The Panama Papers continue to cause confusion in New Zealand as the Prime Minister, John Key, comes under scrutiny for the first time. Yes, the first time. He has always supported the right wing agenda from the 1980s, to create an international financial centre, which was left unfinished. Now the person behind the Panama Paper has come out and directly named Key, and accused him of condoning the financial fraud mecca in the Cook Islands. This takes us back to the 1980s, and the use of the tax haven by the New Zealand company European Pacific, a front for Fay Richwhite and Brierley Investments.
On Saturday the accusation came out, and Key scrambled for a typically banal reassurance for his faithful supporters. Key claimed that the loopholes that allowed the use of the tax haven were closed in 1988, and that no New Zealand based company could use a structure in the Cook Islands. Apart from the bit about use of structured finance, this was completely wrong. Perhaps he was misled by the Inland Revenue Department, but, even so, he still would have dissembled on this one. The Cook Islands connection came out in the Winebox Inquiry during the 1990s. Key was beginning his glorious career with Merrill Lynch on Wall St, and missed the fun. But older New Zealanders will remember it, and the games played by lawyers, as IRD staff showed how clueless they were about tax havens.
It is not credible for the IRD to claim that it was all shut down in 1988. Everybody knows that there were still deals being done, and structures in place, like the Redeemable Preference Share deals constructed by Graeme Tubb of Kensington Swan. Mr Tubb has been senior counsel at the IRD for some time, so they must know how it was all done by now. So why lie about it now? The archives of the Winebox Inquiry are available and there is some indication of how European Pacific, or their activities, continued on in the 1990s.
So what happened in 1988? Well, the Labour Government created a new Controlled Foreign Companies regime, which was meant to be an anti-avoidance measure; and it changed the rules for foreign trusts, so that a new tax haven was created for offshore tax evaders. The first of these measures, the CFC regime, utterly failed and is still being tinkered with to this day. Meanwhile, Fay Richwhite and European Pacific were unwinding structures to comply with the introduction of CFCs, by the start date of 1 April 1988, and re-building the structures again. Then after that, European Pacific decided that it could get into the trustee business, for domestic and offshore clients, since there was no tax avoidance issue.
In May 1988 the chief deal architect, Mark Jones, wrote a paper for a European Pacific Banking seminar. This was a proposal for the takeover of an existing trustee company, or the creation of a new branch of European Pacific. Jones noted the arbitrage opportunity created by the new trust law, given that no other country had removed tax on the income of the trustee. He went on: “where a NZ trustee administers a non-resident trust, then the ownership by that trust of ‘vehicles’ in other jurisdictions would not be subject to the proposed NZ CFC legislation.” In other words, the non-resident trusts could own Cook Island companies, and thereby get around the need to create a CFC that was otherwise New Zealand based. All they had to do was get an extra consent from the Overseas Investment Commission, now called the OIO, that has always been a soft touch for Mossack Fonseca.
There is certainly evidence in the archives of the Winebox Inquiry that European Pacific did indeed create a trust operation. It seems that this operation was sold in 1991. One would presume that it was sold to Trustnet, but that doesn’t matter for the sake of proving John Key wrong. Nor that European Pacific decided to concentrate on a billion dollar ‘structure’ that was previously ‘owned’ by Brierley Investments. The BIL structures were complex, and never exposed in the Winebox Inquiry. Some based in Australia caused all sorts of problems, and the so-called ‘Spassked’ case for related loans and tax deductions went on for over a decade. One wonders whether BIL’s new tax lawyer, Patsy Reddy, had anything to do with this. Dame Patsy Reddy is now about to become Governor-General in New Zealand, and BIL’s chief executive, Paul Collins, has also been knighted. What a club.
Since New Zealand is also a tax haven why not have a tax lawyer as a head of state. But there has always been a constitutional link with the Cook Islands, despite what John Key says about this. Indeed, the Audit Office of New Zealand was mandated to officially audit the Cook Islands government in the 1980s. If they had blown the whistle on the tax fraud, and they were told about it at the time, the Winebox scandal may never have happened, and it certainly would not have resulted in a public inquiry. But, at the end of the day, New Zealand officials are too meek to call out corruption.