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Financial Action Task Force's anti-money laundering review of NZ highlights the openness to abuse of trusts and company nominee director & shareholder arrangements

Financial Action Task Force's anti-money laundering review of NZ highlights the openness to abuse of trusts and company nominee director & shareholder arrangements

The openness of New Zealand companies, trusts, limited partnerships and nominee director and shareholder arrangements to abuse for nefarious purposes is being highlighted by the Financial Action Task Force (FATF).

The Paris-based FATF, an inter-governmental body that sets international standards, is considered the global money laundering and terrorist financing watchdog. Its latest country assessment, or mutual evaluation, of NZ was released Thursday evening NZ time.

FATF notes trusts are very common in NZ with up to 500,000 in existence, which are used for a range of purposes including as holding vehicles for assets such as the family home. FATF points out NZ doesn't have a register of all domestic trusts and suggests the Government considers introducing one.

Meanwhile, FATF says NZ does well on the confiscation of proceeds of crime, I.E.. seizing piles of cash and Ferraris from gangs, but doesn’t do so well when it comes to white collar crime.

"Major gaps in NZ’s framework" include insufficient measures to mitigate the risks posed by nominee directors and shareholders, insufficient mechanisms for authorities to obtain adequate, accurate and current company, limited partnership and trust beneficial ownership information, and insufficient measures for adequate, accurate and current information on trusts, FATF says.

Even though local companies are required to have at least one NZ or Australian resident director, FATF says given authorities’ lack of visibility about whether a director is acting as a nominee director (and for whom they are acting), the effectiveness of the resident director requirement would be strengthened by efforts to ensure effective implementation of targeted financial sanctions by trust and company service providers, lawyers, accountants, and any banks with which an account is held.

"New Zealand’s legal system provides for a wide range of legal persons and arrangements, and authorities have a comprehensive understanding of the money laundering and terrorist financing risks associated with them. In recent years, New Zealand has implemented measures to mitigate the money laundering and terrorist financing risks of misuse of legal persons and arrangements, including the creation of a register of New Zealand foreign trusts, and residency requirements for company directors. However substantial gaps remain in relation to ensuring the availability of adequate, accurate and current beneficial ownership information, and in relation to nominee directors and shareholders.

"New Zealand companies and limited partnerships are vulnerable to abuse for money laundering and terrorist financing purposes due to the low cost with which they can be established, as well as New Zealand’s reputation as a well-regulated jurisdiction. Nominees are able to provide resident director or trustee services for oversees customers. Law enforcement have noted the abuse of New Zealand shell companies for both transnational and domestic laundering. Domestically, trusts are widely used in New Zealand and there are comparatively fewer measures to enable law enforcement to detect the abuse of trusts for money laundering and terrorist financing purposes," FATF says.

'We're number one'

The World Bank's Doing Business Report ranked NZ number one for "ease of starting a business" last year for the twelfth consecutive year. Whilst the Ministry of Business, Innovation and Employment (MBIE) likes to trumpet this and it's great for genuine Kiwi businesses, it's also well known to people all over the world with nefarious intent. Interest.co.nz has documented this over the past decade since then-Commerce Minister Simon Power revealed in 2011 that 143 NZ registered companies had been implicated in criminal activities overseas such as smuggling, money laundering and tax fraud over four years with NZ Police and the Customs Service receiving 134 enquiries about them.

Among the priority actions FATF recommends is improving the availability of accurate and up-to-date beneficial ownership information on legal persons, particularly limited liability companies and partnerships, and domestic trusts, and taking steps to mitigate the money laundering and terrorist financing risks of nominee shareholders and directors.

Just this month interest.co.nz highlighted the use of nominee shareholders and directors in the case of NZ company Vivier, behind which convicted British fraudster Ian Andrews is alleged to be pulling the strings.

Information about the beneficial ownership of NZ companies is not currently collected by MBIE's Companies Office, although Companies Registrar Sanjai Raj can request it for law enforcement purposes. MBIE issued a consultation paper in 2018 proposing to increase the transparency of the beneficial ownership of NZ companies and limited partnerships, albeit it proposed to exclude trusts of which there are estimated to be as many as 500,000 in NZ. There are also 25,709 charitable trusts registered with the Charities Services, and 26,117 incorporated charitable trusts.

"Since most trusts are not required to register, it is not known how many trusts there are in New Zealand. New Zealand estimates there are between 300,000 to 500,000," says FATF.

Table 7.1. Types of legal persons and arrangements
Legal entity Number
(at March 2020)
Number created
each year
(3yr avg 2017-20)
Legal persons    
   Building societies 9 1
   Credit unions 10 0
   Friendly societies 109 0
   Incorporated societies 23,835 743
   Industrial and provident societies 81 2
   Incorporated charitable trusts 26,117 794
   Limited partnerships 2,818 357
   Limited liability companies 649,217 55,168
   Co-operative companies 128 7
   Unlimited liability companies 385 30
Legal arrangements    
   Domestic express trusts 300,000 - 500,000  
   Registered charitable trusts 25,709  
   Maori Land Trusts 20,795  
   New Zealand Foreign Trusts 2,807  

Early last year the then-Commerce and Consumer Affairs Minister Kris Faafoi said cabinet decisions were expected in the second quarter of 2020 on improving beneficial ownership transparency. Against the backdrop of COVID-19, they didn't materialise. In March this year a spokesman for David Clark, Faafoi's successor, told interest.co.nz the project was delayed pre-lockdown 2020 while funding issues were being worked through. Final decisions remain some way off.

“MBIE is working on detailed policy and funding proposals for a unique identifier for directors, general partners and beneficial owners and beneficial ownership transparency. I expect Cabinet decisions to be made sometime next year," Clark's spokesman said.

FATF says that in the absence of a policy decision, corresponding actions have yet to be included in NZ's anti-money laundering and countering the financing of terrorism national strategy action plan.

On trusts, FATF notes NZ doesn't have a register of all domestic trusts.

"Domestically, trusts are widely used in New Zealand and there are comparatively fewer measures to enable law enforcement to detect the abuse of trusts for money laundering and terrorist financing purposes. New Zealand also does not tax trusts with overseas settlors, which has created a market for New Zealand foreign trusts to be used as asset protection vehicles," FATF says.

Foreign trusts are trusts established by a non-resident settlor but which have a trustee resident in NZ. Although they are considered particularly vulnerable to money laundering, terrorist financing and tax evasion, bad publicity stemming from the Panama Papers saw the Government introduce new requirements in 2016 for foreign trusts to register with Inland Revenue and provide key information. FATF points out that as of March 2020, there were 2,807 NZ foreign trusts registered, representing a 75% decline over the previous three years.

"In relation to domestic legal arrangements, New Zealand has introduced policy measures, including law enforcement agencies access to tax information, mandating enhanced due diligence for trusts and reforms of the Trust Act. However, New Zealand is yet to conduct a policy process focused specifically on addressing gaps in access to beneficial ownership of trusts information."

"New Zealand has also identified the money or value transfer service sector as a major risk, particularly alternative remittance providers. While the Department of Internal Affairs and New Zealand Police have taken enforcement action against money or value transfer service providers for breaching their compliance obligations, there is insufficient activity by the relevant administrative authorities to identify unregistered money or value transfer service providers in New Zealand and a lack of clarity as to which agency(ies) are responsible. Authorities should enhance their national strategy to take a joined-up approach to these important risks," says FATF.

'Consider developing a complete trust and company service provider register'

Among things FATF recommends are: introducing measures to improve the availability of accurate and up-to-date beneficial ownership information on legal persons, particularly limited liability companies and partnerships, including consideration of a beneficial ownership register. Additionally FATF suggests NZ takes pro-active steps to improve the transparency of domestic trusts and introduces measures to improve the availability of accurate and up-to-date beneficial ownership. This, it says, could include consideration of a register of trusts.

"This should also include reviewing its framework for mandatory enhanced due diligence for trusts to ensure it is sufficiently tailored to the money laundering and terrorist financing risks," says FATF.

In addition NZ ought to implement measures to mitigate the money laundering and terrorist financing risks of nominee shareholders and directors and ensure full transparency.

"This could include requirements on such nominees to disclose their status and the identity of the nominator to MBIE and when dealing with reporting entities."

NZ should also ensure that trustees disclose their status to reporting entities when forming a business relationship or carrying out an occasional transaction, NZ should ensure that proportionate and dissuasive sanctions are available and enforced for breaches of basic and beneficial ownership information requirements, and NZ should consider developing a complete trust and company service provider register to be accessed by Anti-Money Laundering and Countering Financing of Terrorism Act reporting entities and other agencies.

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21 Comments

NZ should also ensure that trustees disclose their status to reporting entities when forming a business relationship or carrying out an occasional transaction, NZ should ensure that proportionate and dissuasive sanctions are available and enforced for breaches of basic and beneficial ownership information requirements, and NZ should consider developing a complete trust and company service provider register to be accessed by Anti-Money Laundering and Countering Financing of Terrorism Act reporting entities and other agencies.

Does the US enforce these demands in Reno and Delaware.or is it just a means to extend the reach of US authorities into our lives, but not their favoured few?.

The Kim Dotcom affair was a bit of a warning of this overextension. But otherwise it is the battle for unearned income in progress.

Yes the Irony is rich. Having said that what benefit are we getting from being part of the wider cartel of tax evasion enablers?

Nice move. Make this about the US and not NZ's poor track record on transparency of these entities.

17
up

One cant help wonder how many houses/properties in NZ are owned by trusts fronted by local lawyers hiding overseas ownership. Or perhaps even laundering overseas funds....

10
up

That's a million dollar question

Or a billion-dollar question.

Possibly a many billions question.

Averageman
CJ009 (who has now disappeared from this site) was strongly anti-trust seeing them as simply a front for corrupt activities, about circumventing the FBB, and tax evasion. He quoted significant percentage of Auckland properties being owned by trusts - from memory some parts of Auckland over 50%.
My experience of facilitating the sale of a house owned by a family trust (my mother as a settlor) was that there was need to complete considerable disclosures for the bank regarding trustees and beneficiaries. Fortunately the lawyer was a trustee.
Also a similar experience with my wife's family trust when she was looking at buying an additional investment property - gave it away and the trust loaned her the funds to purchase the property under her name.
In both instances the demands related to AML and additional reporting requirements (effective January this year) means that both trusts are now being wound up.
Although trusts have their value, given the difficulties meeting requirements - and with WINZ now looking through trusts - I see considerable decline in family trusts in future.

Sounds rather bizarre when in most cases disclosure with trusts under new laws is not that much of a consideration, sure multiple beneficiaries documentation is a hassle...it just takes some work.. WINZ cannot look thru. Trusts if you have an astute advisor and approach it the right way. There is some very good reasons to have an trust and they are hardly ever raised.

"The openness of New Zealand companies, trusts, limited partnerships and nominee director and shareholder arrangements to abuse for nefarious purposes is being highlighted by the Financial Action Task Force (FATF)."

Check with accountant and lawyers how to protect and manipulate by using trust - no secret.

Wasn't this Lord Key's vision? NZ to be a business registration superpower? Easiest place in the world to 'do business' or something.

Anti-terrorism is repeatedly being used as a means of putting anti-money laundering regulations in place. I think we need to realise that this is just an excuse and government are wanting to increasingly monitor and control citizens.

This may well be the case but I think a more obvious reason is to ensure tax due is paid.

Bingo. I don't think for a minute the powers that be can't find out anything they want, if they want, when they want.

During my working life in the UK, I set up a number of trusts for Inheritance Tax purposes and dealt with landowners where the estates were subject to inter-generational trusts, but never came across the family trusts that are so common here. I became aware of them soon after coming here in retirement and asked the solicitor-this was in 2004- whether or not I should consider them. His advice was not to touch them and I think that was good advice. I would like to see most of them disappear.

FATF is an unelected bunch of anti-human demons. We should not be following their guidance.
AML/CFT does nothing but pile millions of dollars of compliance costs on businesses for very little gain.

That's certainly what a money launderer would say......

;)

Remember privacy and a life lived basically free of the state?

No, I don't either.

Why don't we throw billions and billions into this, and I hope someone in the Fortress of Legislation is working on a Chinese styled social credit system.

... god I hate modern times and having to live in the ruins of a once great and free West as we are herded into the state gulag (no, sorry, we are already living in the state gulags.)

Gangs are very prevalent in money laundering.Does current privacy regulations permit new vehicle dealers from not registering purchasers details ,particularly cash sales,to Police? NZ TransportAgency receives registration details of new cars ownership.Duplicating these details to the Police could help reduce some laundering?