After a bit of a break from blogging, while doing some historical research, the situation has been moving in New Zealand. A new government was elected and there certainly has been some progress, some of it has an element of continuity, and there are new proposals coming out of the bureaucracy. Legislation concerning foreign corporations and the Base Erosion and Profit-shifting measures was passed in the Parliament recently. The enhanced Anti-Money Laundering (AML) regime has come to place this month. And it was also announced that the new requirements on foreigners holding New Zealand bank accounts has been effective, in that those not complying have had their accounts frozen for the moment.
The picture seems to have changed on the tax evasion front. So is New Zealand still a tax haven, and is the legislative framework still in place for foreigners to move money without effective scrutiny? Could be still too early to say. The new AML measures may not be effective, especially as it seems to require so-called ‘professionals’ to report any suspicious activity. A local expert with a PhD from an Australian university, Ron Pol, thinks that the AML regime is still inadequate, based on overseas experience and the expectations placed on New Zealand authorities to make a substantive difference now.
After all there has been a tax haven framework in place, in effect through the trust legislation, since 1988, which was largely unknown. And the officials appear to have been in denial of this, even after it was exposed due to the Panama Papers. Last year a disclosure regime was superimposed on the so-called ‘foreign trust’ sector, and this was judged to have been effective in deterring the money launderers. So there was no talk about there being a tax haven here, even though the trust law had not changed.
But the real problem in denying that the tax haven existed are the views on trusts that remain entrenched in the bureaucracy, and the contradictory proposals that have come out of the ministry responsible for commercial law and company registration. Firstly, there is a Financial Intelligence Unit (FIU) within the police that is now responsible for the AML regime. They put out a report earlier this year that should be concerning. Not only did they fail to address the historical blind eye turned to the tax haven, but they also denied the link to money laundering over the years, which they could not calculate. Moreover, they seemed to accept the place of trust and company providers, who were offering to set up foreign trusts and shell companies.
In the report the FIU appeared to state that money laundering was a possibility through the abuse of foreign trusts in New Zealand. But, given the way the trust law was changed, it was not really an abuse at all, given that it went unnoticed. The FIU claimed that foreign trusts were the result of a ‘principled’ approach to trust law. It is hard to know what the principle was that they are referring to, in fact, it was just a theory about the role of the ‘settlor’ in setting up trusts. As I have pointed out before, the Treasury were advised putting this so-called principle into practice, since it set up a tax haven framework. This international expert was ignored in 1987-88 and the ‘foreign trust’ legal form was born. Now the FIU claim it was a legitimate market opportunity, and led to the development of asset protection trusts. Of course, the asset protection trusts were actually developed in the Cook Islands, by New Zealand lawyers, to provide a product that was immune from legal probing by creditors etc.
The problem with the trust law, and the regime of the ‘foreign trusts’ still remains. So is there still a tax haven, really? Part of the problem with the new disclosure regime, and the move to make settlors provide tax information, was that the ownership of trusts was not to be made public. Only the Inland Revue Department would be informed. The privacy of trusts still remains the guiding principle underlying new proposals. Thus, the commerce ministry, known here MBIE, has two new proposals. One is to make the beneficial ownership of New Zealand companies transparent, both for tax purposes and for public searches. This would obviously be a blow to the money launderers, and those that use New Zealand shell companies. But the foreign trusts would not have beneficial ownership made public, and so the secrecy remains.
The other new proposal seems to move in the opposite direction. Here it seems that MBIE want to maintain the ease of doing business in New Zealand, and making company formation as simple as possible. So they want to restrict the information that company directors have to make public, in terms of residential addresses. They claim that having directors make their residences searchable has, in a few instance, led to harassment. This means that all directors can opt out of this and just have a registered address for the company. A number of points follow from this. Having searched company records on-line I have noticed the difference between a residential address, and a residence. There are many directors who seem to have multiple residential addresses – so where do they actually reside? This applies to directors who are obviously foreigners, but also seem to have New Zealand residential addresses. Some are obvious nominee directors or shareholders, some are not. Then there are the local residents who act as nominee directors, and have many different addresses over time. Someone like Geoffrey Cone has addresses in South America, especially Uruguay, and across Auckland; he even uses his ex wife’s address and their former holiday home.
A similar problem occurs with relying on company addresses, or the ‘address for service’ given by the information provider. Some of these apparently physical locations just don’t exist, there may be a building there but nobody is home. Other times it may be an address in the literal sense, but not for any substantive business presence. Thus it is hard to see how this change to directors addresses would alter the shell company game. The FIU and MBIE like to refer to action taken against the Taylor family over their shell companies, and their historical case of arms trading, but as I and others have shown, the Taylor operation was never shut down, and other family members simply became the new nominee directors and shareholders for the shell companies.
I may well take a closer look at some of the non-existent, or zombie company addresses, located around Wellington (which is the home of the public service in New Zealand). But the point is that the tax haven here still needs to be pointed out before it can be closed down for good, even if the government officials continue to deny its existence.
Government should bring in legislation to reward investigators like you exposing fraud. Clearly fraud is rife in NZ, including from personal experience and evidence I have of it. Rewards could include from recovered proceeds of crime where the victims can’t be found. This will also encourage whistle blowers to come forward to make NZ a better place.
Thanks for mentioning my work. Great to see in-depth, knowledgeable analysis. If readers are interested in these AML effectiveness articles in peer-reviewed journals, they’re free to download until 28 Sept (Emerald Publishing released them with a call to “let’s improve the capacity to disrupt serious profit-motivated crime”). Available at:
“Uncomfortable truths? ML=BS and AML=BS squared” http://doi.org/10.1108/JFC-08-2017-0071
“AML effectiveness: Assessing outcomes or ticking boxes?” http://dx.doi.org/10.1108/JMLC-07-2017-0029
Although AML legislation in NZ is a step in the right direction. The key problems with this regime is that reliance for its regulation is placed on agencies that are either insufficiently willing, interested or capable. Of the three supervisory agencies: the FMA has only recently started to take more than a token interest in its AML obligations.This is likely due to the upcoming mutual evaluation.
RBNZ considers its AML function to be its poor grandchild and sees it as a very low priority compared to its more traditional roles. As such it is not as well resourced as it should be.
DIA has been hamstrung by poor leadership in its AML area for years. This has allowed significant internal issues to produce a very high staff turnover. Additionally, it has allowed some of the teams to behave in a loose cannon fashion and engage in principally race based targeting – specifically one of the teams targeted businesses based on the fact that the owners of chinese ethnicity due to the personal prejudices of one of the team leaders, rather than based on the ML/TF risk.
The new structure has allowed a greater volume of work to be undertaken, but is still plagued with serious leadership problems particularly at the director and team leader/team manager levels. If these leadership and internal cultural issues are not resolved, the DIA AML function will continue to be a mickey mouse operation and an embarrassment to government services.
Yes, the AML has been an issue since the 1990s. The available files from the Department of Justice indicate that the NZ and the Reserve Bank did not want to participate in the FATF process, other than as observers. In fact, the Treasury did not even bother because it could countenance any form of regulation or scrutiny of foreign exchange flows. It had also set up the trust law loophole creating a tax haven.
What I found most fascinating are the cognitive biases. We all have them of course. In this realm, future political and other social scientists will find a rich seam. As far as I can tell, there’s no lack of genuine intent, or any improper motives, even in DIA and MoJ, the traditional homes of closed minds (we know best and will listen to anyone who agrees with us). Most people truly believe they are doing the right thing. And that is the barrier, when belief trumps cold hard analysis the capacity to actually match it with objective reality and better social and economic outcomes is lost. I expect that’s why good people leave, and the staunchest believers stay and are promoted. It took me a while, but the bloody head was the giveaway to the existence of a brick wall. Most of my focus is overseas where people care about better outcomes. A pity, because NZ could be a leader in this area, with vastly better outcomes.
Ron, maybe because NZ is a leader on the wrong side in this area, is the reason and pity NZ is not a leader in righting the wrongs. People on the wrong side and the right side being often associated. NZ is very small.
That is true so it is possible Colin, though with people I assume the positive until proven otherwise. Whilst some evidence is certainly odd, most thus far is consistent with officials genuinely doing what they think best, with no improper motive. Comfortable in the dominant narrative, and dismiss rather than explore anything contrary to the status-quo narrative, irrespective that it might offer better social & economic outcomes for NZ & NZ leadership on world stage for other countries’ benefit too.
I used to assume the positive too Ron, until when proven corruption was ignored and covered up by those liable for taking action and delivering justice against it. The legal industry have a status quo that require them to put the legal industry ahead of the victims of it. For instance, where your lawyer knows the other lawyers are abetting fraud against you, they cover up for their lawyer colleagues and clients rather than pursue justice for their fraud against you.
That’s awful Colin, nor my experience of lawyers. This is no legal advice, but any lawyer that does that faces serious consequences. Lawyers have a fundamental obligation to uphold the rule of law & administration of justice, must not assist/facilitate any person in crime/fraud, or its concealment, and must take steps to prevent crime/fraud through their services. They also must disclose confidential information relating to anticipated commission of serious crime/fraud, and any lawyer with reasonable grounds to suspect another lawyer of misconduct must report it to the Law Society. Failings here are themselves grounds for misconduct, which NZLS takes very seriously (Lawyers & Conveyancers Act & Rules of Conduct, section 4, Rules 2.4, 2.8, 8.2, 8.4, 11).
Thanks for your empathy Ron. Lawyers’ status quo however is to refer to Chapter 10, “Respect and courtesy”, Rule 10.1, “A lawyer must treat other lawyers with respect and courtesy.”
When our lawyer was certain enough to detail in writing the lawyer-corruption within the fraud being perpetrated again us, the corrupt lawyer phoned our lawyer and threatened his professional and personal wellbeing with a complaint to the Law Society for breaching Rule 10.1. Our lawyer backed down despite knowing a fraud was being perpetrated.
Lawyers, including our own, prefer that we are defrauded than bringing their legal industry into disrepute.