Returning to the basic concept of a company, collecting verified information, regulators focusing on policy effectiveness rather than box ticking & other ways to tackle the misuse of NZ companies

By Gareth Vaughan

All around the world company regulators scratch their heads, befuddled at how they can combat the use of shell companies to hide beneficial ownership, avoid taxes, and enable crimes. 

But could there be a very simple solution?

Jack Blum, a Washington DC-based lawyer and senior adviser to the Tax Justice Network, reckons there is. And this, Blum argues, is to go right back to the basic concept of a company, or corporation.

"When corporations were first set up and the idea of a corporation came along, its fundamental purpose was to say if you or I go into a business, we don't have to risk everything we own in the event the business fails. We can actually limit our losses to the stated capital of the corporation," says Blum.

This original purpose has been expanded dramatically, enabling the use of companies for unethical and unlawful activities, he adds.

"The corporation has become a vehicle for anything and everything, - participating in politics, hiding, concealing who the real owner is, hiding transactions, placing business deals in places where you can't possibly find out what's going on. And nobody ever suggested that that was a legitimate reason for setting up a corporation," Blum says.

"I think it really is time to rethink what it is you will allow a corporation to be used for. And the answer is pretty plainly no limited liability unless there's real business with real people who make real decisions about a business. To have a shell that does nothing but get out there and hide whoever's behind it, that doesn't work." 

Thus in Blum's view company registrars should be empowered to simply make sure companies are used for what they were originally supposed to be used for.

"Which is to limit liability after you open up a real business that follows a certain set of rules, that has stated capital, that has officers and directors, and where there's substance. So there are books and there are records and decisions undertaken are discussed and noted by a board of directors. That's the simplest of all solutions. If you do that there's no point setting up shells," argues Blum.

'There is nothing unlawful about this in itself'

The misuse of NZ companies, outlined in part one of this series,  damages the country's reputation especially when put under an international media spotlight. It's an ongoing battle for our authorities to combat well resourced and well advised - by lawyers, accountants and company agents - people intent on misusing NZ companies.

A Companies Office spokesman says shell companies are companies that don't have business operations or any assets, but may be used for various reasons including as a business start-up.

"It’s important to note there is nothing unlawful about this in itself, and it is not always possible to identify that a company is a shell company," the spokesman says.

NZ companies are required to keep company records, such as meeting minutes, plus financial records and the company's share register. The key company disclosure requirement is annual returns, which must be filed annually with the Companies Office. Failure to do this can lead to the removal of a company from the Companies Register. Information to be included in the annual return includes company addresses, ultimate holding companies where they exist, directors details, and shareholdings. 

Blum also points out that the likes of NZ's Companies Office are "making a buck" from selling companies, a culture that can become embedded. Revenue from company incorporation fees and annual return fees are a small, albeit growing, part of the Ministry of Business, Innovation & Employment's annual revenue. The Companies Office comes under the MBIE umbrella. In the June year MBIE's revenue from company incorporation fees was $7.984 million, and revenue from companies annual return fees was $10.035 million. Those figures are up 47% and 11%, respectively, since 2013. MBIE's total June 2017 year revenue was $707.683 million.

Could a register of beneficial ownership information be a major step forward?

In the ongoing battle, one step MBIE is considering is establishing a public central register of company beneficial ownership information. This follows a commitment made at a London Anti-Corruption Summit in May 2016, which was attended by then-Police Minister Judith Collins. NZ's existing public register of companies is searchable but does not provide beneficial ownership information. That means if a company is owned through a trust, by lawyers or accountants on behalf of clients, company agents or nominees, it's not clear who really owns and controls the firm.

So could a register of beneficial ownership information be a major step forward? Jason Sharman, Professor of International Relations in the Department of Politics and International Studies at the University of Cambridge, does see such a move as progress. But for Sharman, whose research includes the study of international corruption, money laundering and tax havens, there are other ways to skin this cat.

"I think it's probably a step forward but in some ways I think it's less important than getting verified information on the beneficial owner. A central registry [of beneficial information] has been introduced with much fanfare in Britain. But having set up a British shell company in the last few months, to me it's still surprising that there's no requirement to prove who you really are if you are setting up a UK shell company. It's like ordering a plane ticket or buying a book from Amazon, you just type in details to boxes. So I think the verified information is probably more important than the centralised open registry," says Sharman.

He says some of the countries and territories that have done the best job improving beneficial ownership disclosure are those that have had the most outside pressure exerted on them. Places such as the Channel Islands, Cayman Islands and British Virgin Islands. When it comes to verified information, he thinks NZ's doing pretty well. Sharman notes that whilst you want to make setting up a company difficult for criminals, the vast majority of companies are used by legitimate people for legitimate purposes. Thus it's a balancing act. And having recently set up a NZ shell company he is impressed by "a pretty good solution."

"The balance New Zealand seem to have is if it was purely a New Zealand shareholder and director there was very little you had to do. But any time you got any foreign involvement in the setting up of a New Zealand company, you had to provide a form and passport copies and immediately you were put into a different [category]. They didn't call it a high risk category, but that was pretty much what it amounted to," says Sharman.

"And then you started having to send scans of the picture page of your passport and so on. I actually thought that was a pretty good balancing act struck there between not to onerous for the legitimate users, but you've got some safety nets particularly for the international abuse of New Zealand shell companies."

Backdoor entry via Australian nominee directors

By law NZ companies are required to have at least one NZ or Australian resident director. I pointed out to Sharman that one scenario interest.co.nz has come across is a questionable Australian nominee director fulfilling this role, helping gain backdoor access to NZ companies. This is highlighted in this story about registered NZ financial service providers and companies linked to associates of infamous shell company incorporator Ian Taylor, and this one featuring Taylor associate Peter Burslem.

Sharman suggests, however, it's probably now easier for criminals to set up Australian companies than NZ ones.

"And again I know this because I set up an Australian company at the same time as I set up a New Zealand one. The process was cheaper in Australia and fewer questions were asked. So if it came to pass that we started seeing stories of the misuse of Australian shell companies and a slight decline in the misuse of New Zealand shell companies, in some ways I wouldn't be surprised," says Sharman.

He says the Australian company he established cost just under A$400, and the NZ one was nearer NZ$1,000. Setting up the NZ company required a passport scan from the owner whereas the Australian one merely involved a web dialogue form for owner details.

(Below is a Skype interview with Sharman).

The frustrations of a regulatory box ticking approach

Covering the issues around dodgy NZ companies over the years something that has frustrated me is coming up against a box ticking, rather than policy effectiveness approach, to regulation. Here are some examples of this.

Since 2014 the Financial Markets Authority (FMA) has had the power to direct the Companies Registrar, currently Ross van der Schyff, to remove companies from NZ's Financial Service Providers Register (FSPR) when they're giving a false or misleading impression about the extent to which they're regulated in NZ. Such companies are deemed to be damaging the integrity or reputation of NZ’s financial markets, and/or NZ’s law or arrangements for regulating those markets. Under these powers the FMA has directed the deregistration - from the FSPR - of dozens of companies. However, many of them remain as registered NZ companies.

This means a NZ registered financial service provider can be booted off the FSPR because it is deemed to be bringing this country's reputation into disrepute overseas. However, such a company may be free to remain a NZ registered company. Earlier this year I asked a spokesman for MBIE's Companies Office how and why it makes sense that a company deemed not fit to be a registered NZ financial service provider is fit to remain a NZ registered company.

The spokesman's response, which features in this story, was ostensibly that the purposes of registration under the Financial Service Providers (Registration and Dispute Resolution) Act and the Companies Act are different. Ultimately MBIE/the Companies Office appear to believe that if a registered NZ company and financial service provider, operating somewhere overseas, is removed from the FSPR, it will simply stop offering financial services. This, as I noted, sounds like the sort of conclusion someone who believes in the Tooth Fairy would draw.

Vivier & Starfish

In my story I gave the examples of Vivier & Company and Starfish Markets. Both were removed from the FSPR yet both remain as NZ registered companies. Vivier's website says it offers a complete financial package including current accounts, savings accounts, debit cards, an online platform, international money transfers and a variety of other services. In 2015 an Irish TV investigation linked Vivier to tax fraud and money laundering, and noted Vivier mortgage customers were fighting to stay in their homes after being hit with penalty interest rates. Vivier is still trying to squeeze borrowers in Ireland, as highlighted by this October court judgment featuring a mortgage with a 29.2% interest rate.

Meanwhile, Starfish Markets' website promotes trading in forex, contracts for difference and binary options. It claims daily trading volume of $30 billion.

In another example of regulatory box ticking, NZ trust and company service provider Equity Trust International was the recipient of a formal anti-money laundering (AML) warning from its AML regulator, the Department of Internal Affairs (DIA), in September. The warning came after the DIA conducted an on-site inspection of Equity Trust International that identified the firm had failed to establish, implement and maintain an adequate anti-money laundering and countering the financing of terrorism programme.

Ironically DIA's announcement came shortly before it emerged that four NZ company clients of Equity Trust International feature in an alleged US$2.9 billion international money laundering operation known as the Azerbaijani Laundromat, something DIA knew nothing about.

Searching a virtual office for 4 financial service providers

Then there's the four registered financial service providers interest.co.nz wrote about in early May, linked to associates of Ian Taylor. A Companies Office spokesman says Companies Office and Department of Internal Affairs staff visited the Auckland business address - Regus Business Centre virtual office facilities - of Etana Custody, Profit Cinda Group, Skyline Market and Centillion General Holding, on June 8.

"The occupiers at this address informed our representatives, that these financial service providers had no physical presence or staff located at Level 10, 21 Queen Street," the Companies Office spokesman says.

And nor was Registrar of Financial Service Providers Ross van der Schyff able to find any indication the four were providing the financial services listed in their registrations on the FSPR. The Registrar was thus satisfied the four were not in the business of providing financial services, and - as the spokesman puts it; "Section 18(1)(b) of the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (the Act) requires that the Registrar must deregister the provider." 

"The Registrar initiated deregistration on the above providers on 16 June 2017, giving the providers 20 working days to lodge any objections to the proposed deregistrations. Following the period for objections the Registrar remained satisfied that deregistration was appropriate and the financial service providers were deregistered under section 18(1)(b) of the Act on 18 July 2017," the Companies Office spokesman says.

Nonetheless, three of the four remain as NZ registered companies. Presumably continuing to do whatever it was they were doing when registered as financial service providers. Centillion General Holding has been deregistered as a NZ company because van der Schyff had "reasonable grounds" to believe it was not carrying on business and there was no proper reason for it to continue existing.

'Just because you've passed a law, doesn't mean it's going to enforce itself'

Sharman points out related issues and regulations are important when you're striving to combat the misuse of shell companies. These include anti-money laundering laws and bank accounts.

"Often a shell company is not that useful without a bank account to go with it," says Sharman. "You want a backstop, or safety net, of your beneficial ownership regime to make sure that banks are really finding out who the beneficial owner is when they're setting up a corporate [bank] account."

Bureaucratic bungling is also a challenge to be overcome. Sharman points out the United States has both a pilot registry and terrorist no-fly registry. There are people who are suspected terrorists and on the no fly list who also hold pilots licences, simply because no one has bothered to cross reference the two data sets.

"Just because you've passed a law, doesn't mean it's going to enforce itself," says Sharman. "I think there's a lot of enforcement and implementation stuff that has to be done to make sure that laws on the books are actually effective in practice."

Re-orient existing regulations towards policy effectiveness

Ron Pol, a Kiwi political scientist specialising in policy effectiveness who recently completed a PhD in anti-money laundering, would certainly agree. As Pol puts it, policy effectiveness is more than just rules that look good in theory and are touted as meeting "best practice" guidelines.

"To meet the gritty realities thrown up by empirical evidence, they should be designed to achieve policy objectives. And better outcomes for New Zealand," says Pol.

"Likewise, the recent extension of anti-money laundering and countering financing of terrorism controls to lawyers, accountants and real estate agents. It was long overdue. But will it be effective?" 

"The policy process reveals unsupported assumptions, circular arguments, a disconnect from empirical evidence, obvious gaps, and a cost-benefit exercise cloaked in apparent obscurantism. Curiously, the process seems to have generated its own rosy set of ‘alternative facts’, even as other jurisdictions increasingly face uncomfortable truths. Nonetheless, it remains possible that regulatory and enforcement agencies might re-focus towards effectiveness," says Pol.

He suggests the new Labour-led government could re-orient existing regulations towards policy effectiveness and plug gaps.

"One of the most egregious [gaps] still favours overseas criminals. If a local meth dealer buys a house with proceeds of crime, police can seize the house and prove its criminal provenance. But if the Sinaloa cartel - through a front, of course - uses lawyers, accountants and real estate agents to set up companies and trusts to buy a few hundred Auckland houses, police can’t do much about it. They have to prove the predicate - overseas - crime that generated the funds. That’s sensible for local crime, which generates domestic crime proceeds, but in a modern globalised economy it gives a huge competitive advantage to overseas crime groups using New Zealand to protect and expand criminal enterprises. It must rankle with police when they try to intercept drugs shipments, but can’t cut off any financing for those shipments that was facilitated by ‘NZ Inc’," says Pol.

What about company agents, key shell company enablers?

Earlier this year I suggested it was time to ban overseas trust and company service providers - company agents - from NZ activities, licence local ones, and hold them to account if their clients break the law. That's because company agents, based all over the world, are able to establish NZ companies for clients who can also be based anywhere in the world, and if the client turns out to be, say an untraceable individual or entity hiring planes to transport weapons in contravention of United Nations sanctions, it's not the agent's fault. They've done nothing wrong.

There's certainly evidence of some creative behaviour by company agents. This includes that of Israel's Archer Consultants. Archer used Napier-based Acura Business Solutions to help get its international clients NZ companies, many of which appear to have enabled unregulated online forex trading, and to provide them with a NZ registered office and address for service.

Sharman, however, has a more nuanced solution than my one above.

"I think you can have a two tier solution. If it's just a question of New Zealand residents setting up New Zealand companies, particularly if New Zealand residents have to enter their tax identity number, that seems good enough. Because the New Zealand Government has a strong enough interest in keeping tabs on them obviously for tax compliance reasons," says Sharman.

"The problem is when you have non-residents with New Zealand companies. Then the New Zealand government has no interest really in following what they're up to and that's where you get the abuse of NZ companies overseas."

"So I think it's a pretty good rule that if you're going to sell New Zealand companies to foreigners then you should be licensed and there should be some sorts of due diligence checks there. And I think in fact that licensing corporate service providers is probably a better solution than just setting up a centralised [beneficial ownership] registry whether it's open or closed [to the public]," Sharman says.

So what does the Companies Office have to say?

The Companies Office spokesman says the requirements of the Companies Act apply to all NZ companies, including shell companies that don't have business operations or assets. Moreover "considerable work" has been done over the past three years to combat misuse of NZ’s company registration regime.

"In 2014 we made changes to the Companies Act to help address the misuse of New Zealand’s company registration regime, including that all new companies incorporated from 1 May 2015 must provide date and place of birth of all directors (these details are not publically available), have at least one director who lives in New Zealand, or lives in Australia and is also a director of an Australian incorporated company, and provide details of any ultimate holding company if applicable. In addition, the powers of the Registrar of Companies under section 365 of the Act were enhanced, for example by allowing the Registrar to require a person to confirm or correct information on the register. Corresponding removal grounds were introduced which allow removal of a company where a request under section 365 is not complied with," the Companies Office spokesman says.

Ross van der Schyff"Companies incorporated prior to 1 May 2015 were given 180 days - until 28 October 2015 -  to comply with the requirement to have a NZ or Australian director otherwise they were able to be removed from the register. These measures provide a New Zealand point of contact and accountability to make it more difficult for criminals to operate undetected, helping protect New Zealand’s integrity and reputation as a good place to do business. There were 2,433 companies removed in December 2015 following the ending of the grace period, for failure to comply. The Registrar [Ross van der Schyff pictured left] continues to remove companies where they are found to be in breach of section 10 of the Companies Act, and the Companies Office is continually assessing the Register to ensure compliance."

It should be noted that SP Trading, the NZ registered company that in 2009 leased a plane to fly 35 tonnes of North Korean weaponry including rocket-propelled grenades, missile and rocket launchers, missile tubes, surface to air missile launchers, spare parts and other heavy weapons with an estimated value of US$18 million to Iran in contravention of United Nations sanctions, had a NZ resident director. SP Trading's sole director was Lu Zhang, whose day job was flipping burgers at Burger King.

Thus as Pol points out, if the much touted "fix" requiring NZ (or Australian) resident directors was intended to deter criminal misuse, it was an exercise in futility from the start.

"The most glaring example was known before the new rules were even promulgated. A New Zealand company was used for an illegal arms shipment between North Korea and Iran. The New Zealand company arranging the arms shipment had a resident director, a young burger flipper whose name was used for a nominal fee. She was prosecuted, but had no knowledge of the company’s activities. The arms traffickers were never found," says Pol.

The Companies Office spokesman, meanwhile, says the Companies Office works in the context of high volumes of activity, for instance dealing with up to 40,000 applications to vary the particulars of directors per month, including when directors are appointed, resign or existing directors change addresses.

"We take steps to ensure compliance within this framework by targeting our resources to areas of focus, for example sampling companies which claim compliance by virtue of an Australian resident director who is also the director of an Australian incorporated company," the Companies Office spokesman says.

Additionally he says the Companies Office's Integrity and Enforcement team requires additional identity and address verification from directors and shareholders who meet certain risk criteria, and this can include overseas based directors and shareholders.

"For example, in the 2016/17 financial year, 163 requests under section 365 of the Act were made requesting further documentation from directors or shareholders of already registered companies. The team has issued 300 such requests in the current financial year."

The spokesman says the Integrity and Enforcement team also carries out regular site visits to registered offices with high volumes of companies registered, including company incorporation agents and virtual office addresses, to check if the required books and records are being kept at these locations. In the 2016/17 financial year he says 63 site visits were carried out, with 62 already done during the current financial year. 

"If the books and records do not exist or are not compliant with the Companies Act then the Registrar may form the view that there are grounds to commence action to remove the company from the register. In the 2016/17 financial year the Integrity and Enforcement Team initiated 282 company removals for not complying with sections 10 and 365 of the Companies Act or under other grounds contained in section 318 of the Act. In the current financial year, 134 company removals have been initiated by the Integrity and Enforcement Team," says the Companies Office spokesman.

He says the volume of site visits, requests for information and "initiation of removal actions" reflects the focus in this area.

"In addition to the work of the Integrity and Enforcement team, the Companies Office removed a total of approximately 39,000 companies from the register in the 2016/17 financial year, for not carrying on business, primarily on the basis of a failure to file an annual return. There were over 590,000 registered companies in New Zealand as at 31 October 2017. The Registrar will continue to take appropriate action in New Zealand in relation to non-compliance with the Act, and assist other enforcement agencies both in New Zealand and overseas when required," the spokesman says.

Additionally he says MBIE and the Companies Office continually look at ways to enhance the integrity of the information held on the Companies Register.

"For instance, the Ministry recently consulted the public on a recommendation from the Insolvency Law Working Group to introduce a unique identification number for company directors. MBIE is currently reviewing submissions received and once that process is complete will provide advice on the proposal to the Minister of Commerce and Consumer Affairs [Kris Faafoi]."

Get some heads on sticks

As Sharman puts it, perhaps the best way to stymie the misuse of NZ companies is for this country's regulator's to get some "heads on sticks." Prosecute people for serious misuse and make sure this is well publicised. This would surely act as a deterrent and show NZ regulators are serious about protecting their country's reputation and aren't to be trifled with.

The problem, according to the Companies Office spokesman, is when nefarious activity is undertaken by NZ registered companies overseas; "The Registrar is not able to take action in relation to activities of companies in other jurisdictions, and accordingly has not taken any such action. If a company has committed offences overseas, we would assist the appropriate enforcement agencies as required."

Based on this and the laissez-faire approach to who can register a NZ company, to protect NZ's international reputation the Companies Office needs to invest significant time and resources into working with overseas regulators. Those pursuing cross jurisdictional regulatory arbitrage are like rust. They never sleep. Look at the example of Innovative Securities. Kicked off the FSPR by the FMA, it remains a registered NZ company and operates across a range of diverse jurisdictions.

But rather than ignore the overseas activities of questionable NZ companies, or spend taxpayers' money and use staff time to track and combat them, wouldn't it be better - as Blum suggests - for the Companies Office not to let entities with no real ties to NZ register as NZ companies in the first place?

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6 Comments

Regular readers will remember the company that features in this warning;

FMA issues formal AML/CFT warning to Fullerton Markets

The Financial Markets Authority (FMA) has issued a formal warning to Fullerton Markets Limited (Fullerton) under Section 80 of the Anti-Money Laundering and Countering Financing of Terrorism Act (AML/CFT Act).

An inspection of Fullerton’s AML/CFT compliance by FMA staff showed that the company did not have in place adequate risk assessment or AML/CFT compliance programmes. These are essential components of complying with the AML/CFT Act. These programmes ensure that firms have robust systems and processes in place to detect and deter money laundering and the financing of terrorism.

Fullerton also failed to carry out customer due diligence in line with the Amended Identity Verification Code of Practice. Fullerton failed to take reasonable steps to fully identify clients who are a politically exposed person, as required under Section 26 of the AML/CFT Act. A politically exposed person is an individual who has been entrusted with a prominent public function, whether in New Zealand or abroad.

Under the warning, Fullerton is required to undertake a series of actions in order to ensure it complies with the law:

·Prepare and implement an AML/CFT risk assessment to the required standard

·Prepare and implement an AML/CFT compliance programme to the required standard

·Review its customer onboarding programme and review all customers onboarded since the start of business.

·Develop a more appropriate level of transaction monitoring rules. Review all customer transactions since the commencement of business. Any suspicious transactions to be reported to the Finance Intelligence Unit of the NZ Police.

·Undertake a review of all customers to check if they are a politically exposed person, using an internationally recognised search tool.

Liam Mason, FMA Director of Regulation said, “The AML/CFT Act came into force in June 2013 and the FMA and other supervisors have provided guidance and assistance to firms to help them to comply. We know that reporting entities have invested significantly in systems and resources to comply with the requirements of the law. 

It’s not fair on those who have made this effort if others do not do so.  The FMA signalled in our last annual report that we would take formal action where we see firms failing to meet these requirements.”

Mr Mason said, “If Fullerton Markets fails to take the actions required in the warning, then the FMA will consider the need for further regulatory responses. This could include civil action, which can lead to penalties of up to $2 million per offence for a company.”

The warning can be viewed here

An insightful piece. But do we think a fraudulent company or a terrorist would park funds through a company or through a trust/partnership or even use NZ as a backdoor when Panama does it so easily and comfortably.
If they do use NZ the reasonable assumption is they use it to defraud people in which case it would be better to advertise on the MBIE/ registrar website the names of companies which are suspect and buyer beware.

New Zealand provided a clean image for shell corporation incorporation
Far better than a shady Panama listing
Since the Panama Papers NZ has tarnished its clean image somewhat but still appears cleaner
Canada also provided safe haven for shell corps as have other countries
No country is immune to having its good name used for appearances sake

Very well written and extremely informative.

I agree with the final conclusion - rather than ignore the overseas activities of questionable NZ companies, or spend taxpayers' money and use staff time to track and combat them, wouldn't it be better - as Blum suggests - for the Companies Office not to let entities with no real ties to NZ register as NZ companies in the first place?

They need to respond to that suggestion. And it is such an easy fix. TradeMe did just that in order to combat/prevent overseas scammers from conducting illegal activities on its website - as they found when looked into that next to none of the users registering from other than NZ IP domains were legitimate. Subsequent to the ban - they then over time implemented a rigorous exceptions procedure for legit overseas domiciled traders. The number of scam sales dropped to a handful of dishonest New Zealanders who they very successfully cooperate with the NZ Police to prosecute.

The Companies Office ought to take note.

Great practical example Kate. I'm sure the Companies Office has genuine intent, but this sort of pro-activity by good companies like TradeMe to protect their customers and their reputation (at a cost that comes directly off their bottom line), is a great example for regulatory agencies. Regulatory effectiveness is not constrained by legislative boundaries. Practical measures, within existing legislation and budgets, can often have very real impact.

Definitely agree but often it is trivial to get those ties to NZ and does not consider that many multinationals do have NZ divisions. So NZ needs to investigate the intent of all companies which really you can only do after the fact. I.E. many NZ companies commit crime and fraud and have ties to NZ and many foreign companies and people do create companies in NZ which do not commit crime and fraud. It is really still the investigation and repercussions which are needed to discourage and prevent future crime and fraud en masse and unfortunately NZ does not have a good track record in that area.

Article pairing: Grants Whisky - because a dirty harsh blend is needed to assault the palette and the very real environment the article reminds us of, with some new chunky details that should not go unmissed.