Palau was originally settled between the 3rd and 2nd millennia BC, most likely from the Philippines or Indonesia.
The islands sustained a population of short-statured Negrito or Pygmy people until the 12th century, when they were replaced. The modern population, judging by its language, may have come from the Sunda Islands.
Sonsorol, part of the Southwest Islands, an island chain approximately 600 kilometres (370 mi) from the main island chain of Palau, was sighted by Europeans as early as 1522, when the Spanish mission of the Trinidad, the flagship of Ferdinand Magellan's voyage of circumnavigation, sighted two small islands around the 5th parallel north, naming them "San Juan".
After the conquest of the Philippines in 1565 by the Spanish Empire, the archipelago of Palau became part of the territory of the Captaincy General of the Philippines, established in 1574 as part of the Spanish East Indies with the capital based in the colonial centre in Manila. However, the Spanish presence only began to express with evangelization, began at the end of 17th century, and its dominance began to take shape in the 18th century.
After 16th century
The conscious discovery of Palau came a century later in 1697, when a group of Palauans were shipwrecked on the Philippine island of Samar to the northwest. They were interviewed by the Czech missionary Paul Klein on 28 December 1696. Klein was able to draw the first map of Palau based on the Palauans' representation of their home islands that they made with an arrangement of 87 pebbles on the beach. Klein reported his findings to the Jesuit Superior General in a letter sent in June 1697.
This map and the letter caused a vast interest in the new islands. Another letter written by Fr. Andrew Serrano was sent to Europe in 1705, essentially copying the information given by Klein. The letters resulted in three unsuccessful Jesuit attempts to travel to Palau from Spanish Philippines in 1700, 1708 and 1709. The islands were first visited by the Jesuit expedition led by Francisco Padilla on 30 November 1710. The expedition ended with the stranding of the two priests, Jacques Du Beron and Joseph Cortyl, on the coast of Sonsorol, because the mother ship Santísima Trinidad was driven to Mindanao by a storm. Another ship was sent from Guam in 1711 to save them only to capsize, causing the death of three more Jesuit priests. The failure of these missions gave Palau the original Spanish name Islas Encantadas (Enchanted Islands). Despite these early misfortunes, the Spanish Empirelater came to dominate the islands.
British traders became prominent visitors to Palau 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 the German Empire in 1899 pursuant to the German–Spanish Treaty (1899). During World War I, the Japanese Empire annexed the islands after seizing them from Germany in 1914. Following World War I, the League of Nationsformally placed the islands under Japanese administration as part of the South Pacific Mandate.
During World War II, the United States captured Palau from Japan in 1944 after the costly Battle of Peleliu, when more than 2,000 Americans and 10,000 Japanese were 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 established pursuant to Security Council Resolution 21.
Four of the Trust Territory districts joined together and formed the Federated States of Micronesia in 1979, but the districts of Palau and the Marshall Islands declined to participate. Palau, the westernmost cluster of the Carolines, instead opted for independent status in 1978. It approved a new constitution and became the Republic of Palau in 1981. It signed a Compact of Free Association with the United States in 1982. After eight referenda and an amendment to the Palauan constitution, the Compact was ratified in 1993. The Compact went into effect on 1 October 1994, marking Palau de jure independent, although it had been de facto independent since 25 May 1994, when the trusteeship ended.
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.