PM says Government to accelerate introduction of second round of Anti-Money Laundering rules to include solicitors, accountants and real estate agents after Panama Papers; Dunne concerned about reputational damage to NZ from tax haven talk

By Bernard Hickey

Prime Minister John Key has announced the Government will accelerate the introduction of stalled plans to pull trust lawyers, solicitors, accountants and real estate agents into the tough Anti-Money Laundering (AML) regime that was launched in 2013 to force banks and fund managers to ensure money they handle is legitimate.

The Government has talked for over two years about planning this second round of extending these tough new AML rules to all those lawyers setting up foreign trusts, as well as to solicitors and real estate agents, but the reforms have been stalled at the officials level since 2013. See more here on that delay in Gareth Vaughan's piece from October 2015 asking "whether a sign saying 'welcome to John Key's South Pacific money laundering paradise' should be hoisted at Auckland International Airport." I called for an acceleration of round two of the AML reforms in this opinion piece from June 7 last year.

Now the intense pressure over the Government's slow response to the highlighting of New Zealand's roles in the Panama Papers as a destination for the questionable use of foreign trusts by Mexican property developers, Venezuelan bankers, Columbian car dealers and Israeli drone exporters has caused the Government to think again. The Government was also criticised for stalling a planned IRD review of foreign trusts in late 2014 and early 2015, which it is now doing in a review by John Shewan announced after the release of the Panama Papers.

I asked Key at his post-cabinet news conference if the Government would now accelerate the second round of the AML reforms, given that currently some trust lawyers are not subject to the more stringent AML rules relating to identifying the source and legitimacy of funds.

"I think so. I think part two of the anti-money laundering legislation does need to be brought forward on the (Parliamentary) order paper," Key said.

"The focus was always rightfully so on part one because that was where the bulk of the work was done, but part two needs to move forward," he said.

I then asked when this would happen, given repeated talk by Justice Minister Amy Adams in 2014 and 2015 of plans for round two, but no confirmation they would go ahead.

"Justice has always thought there were other priorities and like anything, higher priorities, but we're encouraging Justice to see it a slightly different way," Key said.

"We've been arguing that (to bring it forward). They've been arguing there's other priorities," he said.

Asked how soon it would happen, he said: "As soon as we rapidly can."

Banks wanted speedier Round II of AML

Bankers and others have been arguing for the earlier introduction of round two, although real estate industry and accounting industry lobbies are understood to have argued for delays, given the extra compliance costs involved.

The New Zealand Bankers' Association (NZBA) and ANZ argued last year that new disclosure rules for home buyers should be accompanied by the second round of AML rules, to take some of the onus for identifying the source of funds for property purchases off banks.

"NZBA strongly submits that the intention of the Bill would be better achieved by considering amendments that place the onus of identifying and verifying the participants in a transaction on those people who have the direct relationship with the prospective purchasers, in this case this may be parties such as real estate agents and lawyers," the NZBA argued last year in a submission to the select committee considering the new disclosure rules that applied from October 1.

ANZ suggested in its submission the Government should speed up plans to introduce Phase 2 of the AML/CFT Act.

"ANZ queries whether the intention of the Bill would be better achieved by amendments that focus on legislation addressing other parties' involvement in the property transactions and transfer of funds, as in many cases banks will not be directly, if at all, involved in the transaction. This would be addressed by development of Phase 2 of the AML-CFT Act. ANZ submits that Phase 2 should be expedited," ANZ said.

Justice delayed

Gareth Vaughan reported in May last year the Government had not decided when to push ahead with the second round of anti-money laundering legislation.

A Ministry of Justice spokesman told interest.co.nz then that the Ministry had begun initial policy work for the so-called phase two of the AML-Countering Financing of Terrorism Act (AML/CFT).

"But) the timing and scope for this work is yet to be determined. We will communicate with the legal profession and other sectors about phase two at the appropriate time," the Ministry of Justice spokesman said.

These comments suggested little or no progress since October 2014 when the Ministry of Justice said initial policy work for phase two was underway, but no decisions had been made on the exact timing of this, or the specific sectors that will be brought within the Act's scope.

Phase two is expected to extend AML/CFT obligations to businesses and professions including lawyers, accountants, conveyancing practitioners, real estate agents and businesses that deal in high-value goods such as auctioneers and bullion dealers.

"Lawyers’ and accountants’ obligations under the Financial Transactions Reporting Act 1996, which includes requirements such as carrying out due diligence on customers’ identities and reporting suspicious transactions, will continue until phase two reforms are implemented," the Ministry spokesman said.

The AML/CFT Act took effect from July 2013.

Amy Adams commented in a July 2015 speech that "the Ministry of Justice has begun preliminary policy work considering a second tranche of AML/CFT reform to extend coverage to additional Designated Non-Financial Professions and Businesses, including lawyers, accountants, conveyancing practitioners, real estate agents and businesses that deal in high-value goods."

The preliminary work seemed to have been ongoing for over a year at that stage.

"You can expect more of an update on this work as it progresses," Adams said in July 2015.

International pressure too

The Financial Action Task Force (FATF), an inter-governmental body established by the Group of Seven that sets policies and standards on anti-money laundering and combating terrorist financing, effectively removed New Zealand from the international anti-money laundering dogbox upon the enactment of the AML/CFT Act in 2013. However, FATF said it expected to see the AML/CFT net widened to by the phase two initiative by 2017.

FATF recently published a mutual evaluation report on Australia's AML-CFT regime that provides some insights for New Zealand.

"The report underscores the importance FATF places on ensuring that all relevant sectors, eg: lawyers, accountants, real estate agents and high-value dealers, are fully covered under AML/CFT regimes in order to reduce the ability of criminals and criminal organisations to launder money, which in many cases will be the proceeds of crime," the Ministry spokesman said.

Dunne worried too

Meanwhile, Key again denied New Zealand was a tax haven and said international media had not reported that New Zealand was a tax haven. The Australian Financial Review and Reuters have both reported on New Zealand's role in the Panama Papers.

However, former Revenue Minister Peter Dunne took the unusual step of issuing a statement today saying the Panama Papers raised some serious questions.

"I am especially concerned at the revelation that the numbers of foreign trusts established in New Zealand has gone up almost four-fold in the last decade. That explosion inevitably raises perceptions that New Zealand is being used a tax haven, and that is not good for our international reputation," Dunne said.

"These revelations challenge the identity of New Zealand - we do not want to be seen as a country that enables tax evasion. We know how we regard other countries traditionally labelled tax havens - it is more than a little galling to think New Zealand might now be regarded in that light," he said.

Dunne, who was Minister of Revenue from 2005 to 2013, said he could not recall being advised by IRD about New Zealand having a problem or becoming a tax haven.

"That concerns me too, in the light of current revelations. Was Inland Revenue not aware of what was going on, or did they genuinely perceive the issue to be unimportant?," he said.

"The bottom line is that being labelled a tax haven has in transparency and reputation terms, the same impact that an outbreak of foot and mouth disease would have on our reputation as viable primary producer."

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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28 Comments

Panama Papers. The Black Swan that killed the NZ property Ponzi? I wonder.......

I suspect it won't kill it, unless the scale it larger than we could imagine right now.

Oh it will have an impact on the real estate market particularly for Auckland remember last October when the IRD introduced the new requirements for Overseas Investors and the AKL property market literally ground to a halt.

Though this is extremely positive news, and I'm sure the young Kiwis that were being shut out of the housing market will now have a fighting chance to purchase their own home.

The same thing has been happening in London, which is why the Brits made a stand against corruption: http://www.ukunmaskthecorrupt.org/

There was a pause and the processing load by IRD was quite heavy. Even if only 25% was dodgy money it could slow things. If only there was some data.

So John Key moans about conspiracies and Peter Dunne understands the negative impact it could have on the country. It's lucky this got media attention so that the anti-money laundering legislation can be extended.

As a Mexican....
Um, a Mexican pays no inheritance tax, unless, he/she/they do not declare its transfer. Then it is taxable as income on transfer.

Seems that a Mexican with a NZ Trust over local assets, and by not reporting those assets makes them liable for a 25% income tax on the transfer. No Trust, no tax.

Inheritance tax and lifetime gifts

7. What is the basis of the inheritance tax or gift tax regime (or alternative regime if relevant)?
Successions do not give rise to a taxable event to the extent the recipient of the deceased's estate reports this situation in his annual tax return. If such a report is not made, the transferred estate becomes taxable itself. There are no inheritance or gift taxes, other than the 25% income tax applicable to non-residents who inherit shares issued by Mexican corporations or real estate located in Mexico (see Question 10).

http://us.practicallaw.com/1-523-2179?q=&qp=&qo=&qe=

Or as Deloittes say (page 3).
NO Inheritance Tax...
http://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-...

call any of the Eduardos.....

up
16

That Peter Dunne is unbelievable. Revenue Minister between 2005 and 2013 expressing shock horror NZ being used as a tax haven. What the bloody hell was he doing all that time? Looks like he's moved early to cover his arse.

why am I not surprised that they now get round to stage 2 to include RE, bit late horse left long ago, how much money was washed through our property, we will never know

I must be a bit slow can, these NZ/ Foreign trusts buy NZ property?

Yes purchase of a farm with OIA approval that should not have been granted, only picked up because of the panama papers
http://www.radionz.co.nz/news/political/302966/oio-apologises-over-taran...
http://www.radionz.co.nz/news/national/302660/oio-to-take-second-look-at...

Yes, property has been bought via these tax-free Trusts.
Adding to the high inflation of property in NZ.

National did change the law in 2011. So the PM is incorrect saying that tax law has been the same since 1988.
http://www.chapmantripp.com/publications/Pages/New-Zealand-now-an-attrac...

OMG... So the government actually changed the law to help facilitate and welcome Overseas Non-resident Investment to be more competitive with other Tax Havens.

Extract from MortgageBelt's article link: http://www.chapmantripp.com/publications/Pages/New-Zealand-now-an-attrac...

Treatment of non-resident investors in New Zealand funds

In 2008 when the PIE tax regime was introduced, it did not treat non-resident investors well. They could not be zero rated. Instead they had a PIR equal to the top tax rate (currently 28%). This made them unattractive to foreign investors, especially for a fund with income from non-New Zealand sources.

Making New Zealand funds attractive to non-resident investors

The Government recognised that this tax treatment was not sensible from a policy perspective. New Zealand should not be imposing tax on foreign source income derived by foreign investors, simply because that income is derived by a New Zealand fund. Furthermore, a Government appointed task force, the International Financial Services Development Group, pointed out that if New Zealand can make itself attractive as a residence location for foreign funds, there is an opportunity to create additional jobs and income.

Accordingly, the tax change now allows a New Zealand fund to elect to pay tax at 0% on foreign income attributable to foreign investors. The fund will treat the foreign investor as if it were a New Zealand company or trust. However, unlike a New Zealand company or trust, the foreign investor will have no New Zealand tax liability on the income attributable to it, either when earned by the fund, or when distributed.
(If you read on it gets worse, and I love the lines that said 'There will be no New Zealand income tax. The fund will not be registered for GST. Nor are there any stamp duty or other transaction taxes to worry about'.

Sorry can someone explain to me how New Zealand is NOT considered a Tax Haven?

Perhaps he had a brain fade

http://m.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11633891
per the article :

"Our own Prime Minister has not bothered with a sign, but in his case it would read "The buck stops anywhere but here." He has made an art form out of shuffling off responsibility to someone else when things go wrong.
There have been countless occasions when John Key has claimed not to remember (his "brain fades" are notorious) or not to know. It is amazing how often a Prime Minister who totally dominates his government seems to have been left out of the loop when crucial issues are decided."

About time Real Estate agents were included. What a bunch of jokers we have in parliament.

Where is John Campbell when you need him. One of the only TV journalists that challenged this government. Would all still be taking legal highs if it wasn't for his good work. Shame he was removed by the powers at be (was he ?).

@Joe. John Campbell is on Radio New Zealand National At 5.00 to 6.30pm. It's wonderful. Watch it on Freeview so you get an unusual Radio \ TV hybrid that is quite a delight.
None of the stupid affections that mainstream TV news has wallowed in. Campbell himself used to annoy the hell out of me. But in this format he has stripped away the c**p and his true talent shines.
Serious news here.

http://www.afr.com/business/banking-and-finance/anz-westpac-hit-by-hundr...

Glad that could never happen in New Zealand, right..?

Quite interesting statistics from that article:

Surprisingly, the repayment performance of the fraudulent borrowers is better than both banks' average home loan, as is their equity or security coverage.

"Our delinquency rate on foreign income loans is lower than the portfolio average, and a large proportion of these loans are ahead on repayments", Mr Lording said. "Overseas borrowers are also well-secured with the [starting] loan-to-value ratios (LVRs) on these loans 70 per cent.".

A standard Australian borrower can get much higher LVRs up to 90 per cent or more.

ANZ's Mr Edwards said loans backed by fraudulent income documents were "performing better than the portfolio average".

so the banks are willing to turn a blind eye to fraud as long as they can profit from it, why does that not surprise me about banks or the characters that make up the RE industry, bankers, brokers,agents

The fraudulent application + high repayments combo just reeks of money-laundering, doesn't it? High time that real estate came into the anti money-laundering regime. Even just locally, hundreds of millions in meth profits have been shovelled into NZ property since about 1998.

Oh look there's a nice article on the BBC about the Panama Papers going online, could explain the recent turn around of events: Panama Papers affair widens as database goes online

http://www.bbc.com/news/world-latin-america-36249982

its about blooooody time RE, lawyers, and accountants were encapsulated by the AML regime.

As an AML specialist undertaking doctoral research on the money laundering vulnerabilities of lawyers, accountants and real estate agents, the core of the foreign trusts issues is not that these professions are excluded.

I'm not saying they shouldn't be included (they should), nor that it wouldn't help (it should), just that including them in the regime is not a real solution.

It's the design of the foreign trusts regime itself that is the issue. This allows NZ offshore trusts to be used for legitimate purposes, and by illicit actors (tax evaders, money launderers, despots, etc).

Including lawyers, accountants etc under the regime will likely make almost no material difference in practice, if the foreign trusts regime remains unchanged.

Moreover, company incorporation agents are included under AML/CFT legislation. Does it make a difference? Not much. Lawyers and accountants are excluded, but have existing 'AML lite' obligations and code of conduct obligations. Bringing them under the full AML/CFT legislation may further heighten their sensitivities, CDD etc but if the foreign trusts regime continues in its current form, they will still be able to establish foreign trusts that will still be able to be used by legitimate and illicit actors.

By all means bring tranche 2 forward. That's a good thing mainly for other reasons, and may help a bit here. But as a 'solution' to the foreign trusts problem it is a red herring, smoke and mirrors, take your pick.

I have long suggested, in these pages earlier, and in the Listener out yesterday and online since Thursday, that it is, very simply, the way that NZ foreign trusts are designed that is the issue.

Turning off the bit that's attractive to criminals is the real solution.

@ Ron Pol; Yes I very much agree with you. Though I'd love to hear your suggestions for how you would really like to redesign the NZ foreign trust system by as you say; Turning off the bit that is attractive to criminals is the real solution.

Though focusing on the property acquisition, as this seem to be one of the major vehicles and investment destination for money laundering/corrupt officials by Non-resident Investors through foreign Trusts. There's a few areas that I can see that most certainly need addressing:-

1) Capital exchanges from Non-Resident Investors; So the article did mention that Banks would be more subject to disclosure rules and regulations. Will this also take in to account all the Capital Exchange Companies such as: TransferGo, WorldFirst, XE.com, MoneyCorp, PayPal, Transferwise... and the list goes on?

2) The other really worrying area is Real Estate Agents are largely managing the capital exchange. From what I remember when we purchased our home. It was the Real Estate Agency that held the deposit, where as in other countries like the UK, it's the Conveyancing Solicitor/Lawyer that holds the deposit and manages the capital exchange.

Is the Government looking to move the responsibilities of the transfer of property capital exchange (From the Purchaser to the Seller) via more a responsible and qualified parties, such as the conveyancing Solicitor/Lawyer?

I don't think it's a good idea to leave this responsibility with Real Estate Agents since that's very high risk. Plus the Real Estate Agents have previously been asking for delays for the Phase 2 of the AML-CFT Act, sounds like they can't handle it to me.

3) Lastly – the property Auction system; not sure if the government can intervene here, but is there anyway that the Real Estate Agents can fully screen potential buyer/investors before they go to auction?

This system is so geared in favour of Investors and so open to corruption it's a joke. It might be better to restrict to just auctioning properties over the 1.5million mark, as it would take the pressure off the Real Estate Agents for the screening process. This would certainly help NZ buyers and particularly FTB's if they don't have to compete at auction for the lower priced property.
Having been through the buying at auction process, it is a very intimidating experience and has certainly accelerated the Auckland property price inflation.

@CJ109

First mooted here (Interest 11 April): http://bit.ly/1SYkZ10

More here (Listener 5 May, main story):  http://bit.ly/1T0HfJj  with "box out" outline of a possible solution here (& having the actual information it then becomes a meaningful part of the normal information sharing arrangements, which I assumed but should have made explicit reference to): http://bit.ly/1OlgY2P 

I don't think our NZ journalists have their heads around trusts or tax laws......

Our tax law is out dated for the 21st century.......information sharing and agreements are nothing more than patching the seams and waiting for the next leak to occur. The system just becomes more convoluted that the bureaucracy and politicians do not know what is actually going on.
I'm all for one tax for all.....tax residency is outdated.

NZ Herald just now, AML extension to lawyers misplaced as 'solution' to foreign trusts issue:

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11636674 

A poor man resorts to crime in order to survive.
New Zealand is a poor man