Ron Pol says 'tax haven' misses the point: New Zealand’s reputation offers a competitive advantage, and opportunity

By Ron Pol*

Since the Panama Papers story broke a week ago Prime Minister John Key has been busy telling anyone who'll listen that New Zealand is no tax haven. Commentators and politicians who suggest otherwise have got it wrong, he has claimed. Key has also defended not taxing offshore trusts, presumably as part of a vision for New Zealand to be a South Pacific version of Jersey or Switzerland.

But Key's assertion and the vision seem incompatible. Surely a country can’t strive to be seemingly the very thing it eschews? In a sign of how fast the issue is moving, the Prime Minister this morning changed tack, announcing a review of foreign trusts.

Much of the commentary on this issue, however, seems ideologically based on political grounds and economic philosophy. I don’t profess to have all the answers, but more non-partisan discussion might help reveal effective alternatives for policymakers to consider.

This article offers a timely suggestion, and invites readers' comments to help advance informed debate and contribute to that discussion with a practical suggestion. I also invite reasoned debate on policy settings that might achieve the seemingly contradictory objectives of securing the economic benefits without the associated opprobrium of tax haven status.

New Zealand a tax haven, or not? 

First we need to dispatch some myths swirling around the “tax haven” straw man which seems to be drawing attention from the real issues, and potential opportunities. 

On the usual attributes, of low taxes and secrecy, it is possible to argue that New Zealand is not a tax haven. New Zealand taxes all who fall within its legislative framework. Offshore trusts are required to disclose trustees’ details, and New Zealand has information sharing agreements with other countries. For good measure we can add that the OECD has given New Zealand’s tax system a clean bill of health. 

On the same criteria, however, it’s possible to claim that New Zealand is a tax haven, at least for the owners of New Zealand offshore trusts. Structured appropriately, foreigners pay no tax. And if these structures allow their overseas owners to avoid paying tax elsewhere (even putting aside morality and international comity implications of willful blindness to illegality elsewhere, and the wistful fancy that turning a Nelsonian eye to damage done to other countries’ tax bases won’t affect New Zealand’s reputation), on current policy settings at least it doesn’t affect our tax base. 

Nor does New Zealand ask about beneficial ownership, so the real owners of New Zealand’s offshore trusts can shelter behind professional and corporate nominees. Nor do we typically know much about the source of funds, or any of the transactions in which these secretive companies and trusts might be involved. In relation to our international tax sharing arrangements, we can’t share information we don’t ask for, so that hardly dents secrecy. 

And the OECD report? It said good things about the rest of New Zealand’s tax system, but pointedly exposed gaps in the offshore trusts and companies regime, such as allowing nominees and not maintaining beneficial owners’ details. Another 2013 OECD report also criticised “serious deficiencies” and the ease with which “shell companies were being established in New Zealand… as fronts for international laundering of drug money, fraud and terrorism”.

The Financial Action Task Force, co-located in the OECD’s Paris headquarters, also requires member states, including New Zealand, to obtain information on “the beneficial ownership and control of legal persons”, particularly for countries which allow nominee shareholders and directors to mask the real owners. Those rules are designed specifically to prevent the misuse of corporate structures for money laundering and terrorist financing that the OECD identified. By not requiring firms to seek those details, New Zealand plainly doesn’t meet its international obligations, even for trust and company service providers subject to anti-money laundering controls who might rely on the IRD form for the information required. And lawyers and accountants remain completely exempt. 

If New Zealand’s overseas trust sector generates $24 million, at say $5,000 each, that’s potentially another 4,800 opaque structures every year, all inevitably tarred with the same dirty grey reputational brush, whether established by local accountants and lawyers, or by overseas firms like Mossack Fonseca - either directly or in association with the local legal and accounting firms among the more than 14,000 law firms, incorporation agents and other middlemen that Mossack Fonseca and their ilk have worked with.

To cap off discussion about New Zealand’s purported tax haven status, some of the objective commentary which has managed to rise above the noise of political point-scoring has been blunt. Governments ignored early warnings from Transparency International and IRD to protect against the reputational damage of “allowing property and funds to be hidden in New Zealand based foreign trusts” by “strengthen[ing] our regulatory framework for disclosure and record keeping”. A tax law specialist says that the treatment of foreign trusts is the only instance where New Zealand is “right out of step with OECD norms”, [and] “plainly a tax haven”. Academics and economists add that the loopholes have been so well signposted as to make New Zealand complicit in “schemes to avoid tax”, and in “shady, dishonest and criminal behaviour”. 

For ordinary kiwis then, New Zealand is no tax haven. All New Zealanders pay tax, comprehensive details are collected, and information is shared with other countries. But one special group may well regard New Zealand as a tax haven, as the IRD informed the government a few years ago. Foreigners who set up offshore trusts pay no tax and enjoy complete secrecy on their ownership and activities. Mossack Fonseca seems to agree. Its website recommends 13 countries for clients to compare, and lists New Zealand alongside Belize, the British Virgin Islands, Panama and the Bahamas. Other company formation agents also “usually suggest” New Zealand as a “tax free offshore” destination alongside Mauritius or Seychelles. (And overnight we’ve learnt that Mossack Fonseca bragged about just how easy it is to use New Zealand’s lax due diligence laws to hide their tax-free profits, which as outlined above is hardly a revelation).

Tax haven label a red herring 

So, tax haven, secrecy haven, or neither? Any can be argued from the basis of unyielding ideological, political or philosophical economic dogma. Objectively, however, the label may be an irrelevant red herring. Whatever term is used to describe it, the activities that the current policy settings allow are reasonably clear. For the reasons outlined above, that makes New Zealand an attractive place for the clients of firms like Mossack Fonseca. Beyond a futile argument over semantics, it therefore seems to me at least that the real issues for policymakers are whether those settings remain appropriate, and whether any alternatives might generate better outcomes for New Zealand’s economy, and reputation. 

A new offshore model, and competitive advantage 

The problem with the current model is not that foreigners pay no tax on offshore trusts. That’s a matter for government policy, (although it would be good at least to align such policies with other countries to stop people taking advantage of the different rules and avoid paying tax entirely). 

Nor is it inherently a problem that secrecy is afforded to such corporate structures. That too is a matter for government policy. Some governments may choose full transparency to ‘out’ illicit actors, yet offshore trusts and companies also serve many legitimate purposes, such as for joint venture partners in different countries working on confidential transactions. Or for a well-known company to secure a big landholding through multiple shell companies in which its identity won’t be revealed so as not artificially to inflate prices, as Disney did before building Florida’s Disney World. The issue for policymakers is not whether these characteristics are inherently good or bad, but to base policies recognising that these attributes, especially secrecy, are as attractive to some of the world’s worst criminals as for legitimate businesses. The policy response is therefore not simply to retain the blanket secrecy status quo or to replace it with wholesale transparency. Neither may be optimal.

Likewise if New Zealand wants an offshore trusts industry untainted by its usual travelling companions of reputational damage and international condemnation. Any new model should retain its value for legitimate actors, yet repel drugs traffickers, corrupt politicians looting their countries’ wealth, tax evaders and money launderers ‘washing’ the criminal proceeds of all manner of unsavoury profit- motivated crimes.

Complete ownership transparency in a public register is commonly touted as ‘the’ solution, sometimes even a global register for all companies in all countries. Notwithstanding claims that exempting trusts leaves a “huge loophole”, the world’s first beneficial ownership register was launched in the UK last week. The EU’s Fourth Anti-Money Laundering Directive (pdf) also requires member states to compile their own beneficial ownership registers for a wide range of legal structures, including “legal entities that own legal entities”.

New Zealand already has a good company register with most details freely available. To match the growing international movement seeking to prevent criminal proceeds and terrorist finances flowing unimpeded through impenetrable corporate structures, New Zealand needs only to add other legal entities and beneficial ownership information to strip away the obfuscation of nominee control and ownership.

This may, however, be too blunt an instrument if New Zealand wants to develop a ‘new model’ offshore trusts market. A public register would be equally unattractive to those with legitimate confidentiality needs as for those involved with the financing needs of criminal enterprises.

A nuanced solution

A more nuanced solution might involve a beneficial ownership and activities register accessible only by tax and enforcement authorities. The IRD and police can monitor for illegal activity, and have no interest in legitimate commercial deals. Legitimate businesses may be wary at first, but this is where New Zealand’s reputation carries weight, and competitive advantage. Combined with strict confidentiality provisions, matched in practice, businesses from around the world may be attracted to New Zealand, for all the right reasons. The world’s criminals may continue to deal with jurisdictions like Panama and Delaware if they protect the interests of criminal and legitimate enterprises without distinction, but criminals would find little to like about a genuinely ‘clean’ offshore trusts jurisdiction with ‘real time’ enforcement oversight. 

Nor need a ‘clean’ model, shorn of any perception of illegality (and its associated reputational risk), represent any loss in value to the industry supporting it. Implemented well, the offshore trusts industry might instead experience growth if legitimate businesses the world over transfer their offshore business to New Zealand. The ‘Panama papers’ scandal illustrates the huge reputational damage for people and businesses associated with traditional secrecy havens that make little distinction between legal activities and the unsavoury business of the world’s criminals.

A ‘new model’ New Zealand option may therefore be attractive for hundreds of thousands of individuals and businesses who need a safe place to conduct legitimate business. French and American companies, for example, working confidentially to develop a joint venture in China might operate within the safety of New Zealand offshore trusts and companies.

A secondary benefit is that commerce should also be easier for legitimate businesses using ‘new model’ shell companies and offshore trusts. Banks will be more assured of their probity, without the flurry of red flags accompanying transactions conducted by shell companies operating from havens awash with the financial activities of organised crime groups and terrorists, (or even its perception, as undeniably associated with the inelegance of New Zealand's current model).

Perhaps this ‘clean’ model is what the Prime Minister had in mind, and it just hadn’t yet been fully developed or articulated. In any event, it seems to me at least that there’s no need for New Zealand’s reputation to be tarnished by association with the traditional model that in effect turns a blind eye to the black money of drugs cartels, tax evaders and other serious crime. Nor need New Zealand join the call for harsh sanctions against tax havens if its offshore trusts industry can compete them away.

Ultimately, to whatever extent this suggestion survives or is re-shaped by reasoned debate (or unfolding events), the ‘made in New Zealand’ badge could potentially become a world-recognised reputational quality mark for (legitimate) offshore trusts and companies crafted by professionals in what could become the world’s leading hub for facilitating the confidential (legitimate) dealings of the world’s biggest companies. Or we could tenaciously cling to the status quo reputation of an old-style haven, and hope to hold our nose long enough for the stench to dissipate. Either way, the policy choice is at least a simple one. (Provided of course that further revelations don’t make the discussion redundant, with rational, evidence-based decision-making overtaken by sheer political expediency).

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*Ron Pol is a legal business consultant who has spent more than two years conducting in-depth doctoral research for a political science PhD in policy effectiveness, and anti-money laundering. He can be contacted via AMLassurance.com or TeamFactors.com.

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66 Comments

One of the odder things in life is that in order to be a successful tax haven, you need a reputation for honesty. New Zealand already has that reputation. It's a valuable thing, reputation, and New Zealand should be leveraging it.

Here's hoping we don't throw the baby out with the bathwater in the inevitable knee-jerk reaction.

Really. Do you think that the Cayman Islands, the British Virgin Islands, Panama, Luxembourg and several others I could name have 'a reputation for honesty?

And the US (always one anyway, Delaware, Nevada, Wyoming) is getting bigger (FATCA, CRS).

Also, many shell companies/trusts may be registered in BVI, Panama, etc, but the cash/assets reside elsewhere, in reputable countries such as US, UK, Au,... NZ?

And reputation is not what it was. The biggest academic research project of its kind to identify whether shell companies could still easily be created without providing details required by the international standards found that many of the traditional tax havens were the most assiduous in requiring beneficial owner details.

Many of the countries with seemingly the best reputations required the least (or no) verification.

So, while the media reviles the so called 'known' tax and secrecy havens, everybody actually in the know is quietly using those places with the best reputation. It's a lot easier to launder criminal funds when nearly everyone's looking somewhere else.

This reads like Ron Pol is dancing along a very fine line here. He talks about stopping criminals, but seems to say nothing about stopping people avoiding paying tax. "Illicit actors" could be a fraught term as what might be illegal in one jurisdiction, may not be here because of a gap in the law, and there are plenty of commentators who have identified repeatedly about gaps in our laws. Never the less a good article that makes some interesting points.

Thanks murray86. Good point. Tax evaders are criminals too, but you're right, as it is now it may be possible for someone to use an NZ offshore trust and not be liable for NZ tax (so, no evader/criminal by our law), but if they're also not liable under their own law, tax free may even be 'legal'. That really is a matter for international comity to stop 'legal' arbitrage (& the glaring gaps between the main tax sharing agreements show that's not easy, let alone the BEPS work). But for the most part if someone parks funds in/under an NZ structure for tax evasion purposes, they'll likely be evading tax in their home country.

And there are those who may use such structures for any number of other reasons than tax evasion which seems to be getting most of the attention, or at least alongside the salacious but legitimate which people may tire from

So...using this warped logic, lets say the money in these trusts had been stolen from aboard. How does that make us look? I'm pretty sure the Chinese government would love to know about Mr Wong's secret NZ trust which they knew nothing about and the amount in it.

So right there in that last sentence is what needs changing:

1: A Name of the account holder + nationality made public
2: The amount in that Trust
3: The transaction record of how that money came to be in the Trust

Name ONE government that would not want to know this?

If there's nothing to hide then "transparency" is the aim of any law change. And it is ironic Key won't release his records, along with deleting his government owned phone records and texts to boot.

"Name one government that would not want to know this" - that's easy - how about the NZ government?

You guys need to read properly my statement. My point was what government would not want to know what their OWN CITIZENS have in foreign trusts.

"Name ONE government that would not want to know this?"

There is currently a long list of them, they want your money no questions asked.

Thinking about this over night Ron, what the Government could do is amongst all the trust documents is require a tax certificate (annually at least) from the country of origin. this would provide evidence of tax paid. If there isn't one all assets of the trust are taxable here!

I'm no tax lawyer, but do know its hugely complex. If someone proves paying some tax in country X, but actually is taxable in country Y, how will we know? But this is exactly the sort of thinking required, thanks for engaging Murray. Rather than (politicians, media) rail against it all, actually find solutions.

Someone in the US was quoted saying internal MossFon papers say that 95% of what they did was tax evasion and money laundering, and they've set up 250,000 anonymous companies. It's what those vehicles did in the criminal financing of drugs, arms, human traffickers that we really should be focusing on.

Frankly who cares if David Cameron or John Key has an offshore trust for legitimate reasons. The media focusing on the salacious instead of what matters itself potentially risks exhausting the public, and a lot of that other stuff might well stay under the rug where they thought they'd safely stashed it.

It's a bit like Henry Ford

You can bet he never foresaw that cars would be used as car-bombs or get-away vehicles

Comes down to "country of origin" doesn't it Ron? If there is a declared country of origin how will we know if it is genuine? Any tax certificate could be verified with the authority who supposedly issued it. Also your other point (in the main article) about commonality across borders on tax laws (liability and rates) is valid too - someone avoiding tax in one jurisdiction gets picked up in another and is still liable for tax, this would tend to capture the tax evaders and make it less worthwhile, and then only the illegal money is left. These would probably not mind the tax if they don't get caught for how they got the money. Info sharing would then nail them. Actually if done properly this could stop a lot of illegal and tax avoidance problems couldn't it?

Absolutely, "if done properly this could stop a lot of illegal and tax avoidance problems", it should indeed be possible to craft something that wipes out neither the trusts industry or New Zealand's reputation. And that's the beauty of a forum like this. Throw some ideas out, some work, some don't, and maybe a few could even be picked up by policymakers and advisers. Thanks murray86.

Frankly who cares if David Cameron or John Key has an offshore trust for legitimate reasons. The media focusing on the salacious instead of what matters itself potentially risks exhausting the public, and a lot of that other stuff might well stay under the rug where they thought they'd safely stashed it.

Possible.

But - The gravest danger of casting the tax debate as some tribal battle between the same old foes is to us – the little people who pay taxes, as Leona Helmsley once deathlessly observed. A tit-for-tat between parties does society in which we all have a stake no favours. Down that path, the path where ordinary people conclude that politicians and companies are all in it together, lies a corrupted society like Greece, where top-tier tax dodging eventually trickled down to dentists and doctors and beyond.

The idea that Britain – where people traditionally paid tax relatively willingly – could ever end up anything like this was unthinkable only a few years ago. It is now rather more thinkable, with the accretion of endless stories about Google, Amazon, the Panama Papers names … Never mind the details. Over time, overall impressions are taken. In the end, ordinary people will only know what they believe, and the fear for society is that they will begin to act accordingly. Read more

All hail Milton Friedman's Free Market economy! Sacrifice the common people to the gods of greed and hubris! Rip out their hearts, while we dine on wine, women and song! history always repeats

"Do not expect a genuine expose of western capitalism. The dirty secrets of western corporations will remain unpublished. Expect hits at Russia, Iran and Syria and some tiny “balancing” western country like Iceland".
https://ellenbrown.com/2016/04/10/the-war-on-savings-the-panama-papers-b...

Charles Moore, in the Telegraph (10th April), makes an interesting observation:

'By the way, if Britain and other Western countries do try to “clamp down” on tax-havens, the result will not be the end of them, but their migration to other places. The biggest – it is already very big – will be Hong Kong, because none of our bold Western moralists will have the guts to challenge China on this issue. The theoretically Communist government in Beijing will be more than happy to look after the personal gains of capitalism if we repudiate them ourselves.'

There was a brilliant piece suggesting that Russia was behind the Panama leaks, which sounds bizarre, but...
http://www.independent.co.uk/news/world/politics/the-not-completely-craz...

Conspiracy theories aside (one hopes), irony is nonetheless evident all over, not least that under current settings (including the one way FATCA and US not joining up to the other big info-sharing club, combined with the 'open notoriety' of Delaware, Wyoming, Nevada etc, and the ease of using LLC's to buy up swathes of real estate anonymously (bar a few limited checks now in NYC/Miami) that the first and most strident country to establish ML controls is arguably the world's leading money laundering destination. On real estate, London not so flash too of course. Then all the other 'non' havens...

NZ should take a lesson from its leader..No publicity is bad publicity and be happy that it will get more hot money coming in, now that its reputation is established. The more the merrier...

Why did John Key keep saying the words 'tax haven' all this week. Simple. He does not want you to think of all the other issues going on here. For example he does not want you to be thinking about 'stolen money haven'

Crosby Textor advice apparently. Clever.

". Crosby/Textor call this "message discipline", meaning a politician sticking to prepared lines no matter what the question or occasion lines that are mostly written by others."

If the country only benefits by $24 M per year and risks harbouring criminal money, facilitates tax evasion, money laundering and bunch of other stuff that undermines the tax systems and laws of other countries, I cannot see the benefit to NZ or the decent law abiding world in general. I have to ask again - who's interests is John Key serving? It certainly does not line up with the interests of the NZ voters. Who is pulling his strings?

I for one can't answer those questions, but yes $24m seems incongruous in the context of massive reputation damage. Just ask the Philippines. Arguments about the importance to the economy of the gambling sector won over, and they excluded even casinos from their anti-money laundering laws. And then an $81m theft from the Bangladesh central bank account in NYC funnelled through a bank and remittance company into Filipino casinos and mostly gone overnight has trashed the country's reputation. And it would have been even more. $21m was stopped at Sri Lanka by a typo, and the vigilance of US authorities stopped another $850m.This is the new normal. The numbers are huge, and it happens overnight. It doesn't matter what country we're in, organised criminals will use the loopholes presented. And just saying they are not loopholes doesn't actually make them not. Just ask the Philippines Govt now what their reputation is worth if they could have thought about it a bit more objectively back then? Exempting casinos? Really? Or exempting offshore trusts and asking for no information? Really? Fact is, it possibly can be done in a way that preserves (and grows) the industry and serves only legitimate interests:
http://www.interest.co.nz/opinion/80991/ron-pol-says-tax-haven-misses-po...

But the kneejerk political reactions in many countries well lurch some countries to extremes, which may assuage immediate political concerns but are not necessarily better for anyone

Sorry Ron but I don't see how your answer relates to John Key. He has pushed hard for this sort of activity - NZ, the Switzerland of the South Pacific; Fran O'Sullivan's observation of the glean in his eye at the thought of the secret trust activity in Jersey. And he is now defending it as as hard as he can go. Why? $24m per year? At the cost to our good reputation and international relationships. Ok there may be unintended historical loopholes but I cannot see any honest motive that meaningfully benefits our nation that explains why he is so actively promoting this activity.

I don't get it either Chris. It is only $24m so one option is just to close it down. But the PM is right too that offshore trusts aren't inherently bad. They serve many useful purposes. Just think someone from one country, working alternately in several others then retiring somewhere else during their career. A single vehicle (from which taxes are all paid) makes perfect sense, as well as the other examples in my article.

So, if evidence-based policymaking means anything, perhaps we might explore solutions that allow the good purposes and close out the bad purposes (tax evasion, laundering for drug traffickers, etc). And thus retain/enhance the 'clean green' reputation. But no-one seems the slightest bit interested, and we just lurch from one knee-jerk reaction to another.

Personally I figure it might also be better to be prepared with a few solutions before the 60,000 references to NZ is released as well.

But I'm a political science researcher, not a politician, so can't fathom why what seems so obvious, apparently isn't. And being non-partisan and no conspiracy theorist, my working theory is that all parties are trying to do what's best for New Zealand. Which just makes it all the more baffling.

"Just think someone from one country, working alternately in several others then retiring somewhere else during their career. A single vehicle (from which taxes are all paid) makes perfect sense, as well "

But why the secrecy? Why not have this person disclose the same details that I am required to disclose within NZ? What has this person got to hide?

I'm with you, have never used them and probably never will, but some do find them useful. The sort of person described will disclose details to the relevant authorities in each country. But the complexity of tax laws goes both ways. The muddle FATCA, CRS and double tax arrangements etc supposed to mean that you pay tax only once (offsetting that paid elsewhere) doesn't always work that way for people operating beyond the simple situation of a few countries. So they don't hide what each country is due, but may 'hide' it after tax paid so that it's not taxed again, and can be downloaded again when they decide where finally to settle.

Of course, there may be a fine line for some if legitimate tax planning for global citizens morphs into tax evasion, and laws differ as to what's lawful and not in each country, but at some level of abstraction there are essentially two classes of users, legitimate and illegitimate.

...appreciate a writer who engages. Thanks Ron.

I agree. Thanks Ron.

thanks rastus and Chris-M, I appreciate genuine, tolerant, constructive debate, offering accretive ideas towards something that may help in a practical way, better for all, it doesn't matter if we agree, but engage. And this is one of the better places for in-depth analysis and debate, mostly absent personal sledging and dogmatic positioning impervious to thinking. And in seeking comments, simply a responsibility to engage. Cheers.

Thanks Ron. Being a political scientist certainly must come with constraints and discipline you away from controversial conclusions, no matter how reasonable they may seem. Regarding your example. If somebody is working around the world they must obviously pay unto which ever local Caesar they are obligated. If they want to repatriate the net income to a home base then in my mind they have a straight forward choice of two. Their birth country or where they will chose to make their future/final home. If they chose some other intermediate, place I suspect that that is because they can some how work the system and avoid their obligations. So even in that case I believe that we should not be allowing this. At this point the American tax system comes to mind. As I understand it, all American citizens must file a tax return no mater where in the world they live /work. The only way out of this is to renounce your USA citizenship. The point being that your home country has an ongoing responsibility for you and affords you a lot of rights. In turn you have an ongoing responsibility to them. I am not saying that Americans do not manipulate the system to get round this as do the rest of the world, but the principle seems just and anything short of that is not.

Fair point. And how countries choose to tax is a policy matter. I also do hope it's clear, and if not, useful to say it, that my comments on tax aren't as a tax expert (I'm not), but from the money laundering perspective, in which I'm not as concerned with the source of funds (evasion, trafficking) as enabling patterns for more effectively getting to the root of the criminality itself.

JK has other issues atm, like flying to China to explain why he couldn't get rid of the dreaded Union Jack from the NZ flag for the Chinese.

Presumably they'll want their money back!! Doesn't Mr Key realise that 70% of Kiwi's have British heritage.

Power to the people......via the Cayman Islands...and whoever owns Honk Konk trusts. ..Please note the last comment.

beep..beep...wake up NZ.

http://wellington.scoop.co.nz/?p=87759

An earlier article by Chalkie aka as Tim Hunter is even more illuminating, hence depressing.

Remind us

What "benefit to NZ" was achieved by the sale of Wellington Electricity Distribution Network

I would hazard a guess than 30-40% of the money held in offshore/foreign trusts comes from very dubious sources.The scale of some of the money laundering that has taken place is quite scary. In London the authorities have frozen around £1bn of property assets that belonged to the family of Col. Gaddafi.

It's chilling also to compare numbers with volume. I've not seen any evidence of the proportions of legitimate/illegitimate, so hypothetically assuming the best case scenario that the number of legitimate structures is higher than those set up for criminal purposes. Even if that were the case, the amount of money involved in the latter seems likely to be vastly more. A professional working in multiple countries over a lifetime will have nothing like the income that the cartels need to shift every month, ditto the billions looted from their countries by corrupt politicians.

Unfortunately only the early trails of this stuff is likely to be in the MossFon papers. Enforcement authorities need the capability to track some of this.

Shouldn't one of the biggest questions we should be asking is "what are our regulators doing to enforce the Anti-Money Laundering Regulations we have in place?".

There is money laundering legislation in place but no point in having it unless you have someone policing it.

Having spent some years on doctoral research on anti-money laundering within a policy effectiveness framework (ie not just do we have the prescribed rules, but do they actually work (globally & locally), and what practical things might make them more effective), the short answer for offshore trusts is (a) the AML rules don't always apply (& MossFon shows how regulatory arbitrage deals with gaps), (b) even if the rules do apply, they can be circumvented (the NZ vehicle may only be one of a chain, and other links added/changed later), and (c) the activities that the corporate vehicles may be used for (arms trafficking, laundering, whatever) may occur after they've been established, and readjusted, so the unwitting legitimate initial service providers may have limited or no visibility of what's really happening.

(Of course, if the service provider is later found to have been wilfully blind to obvious red flags and failed to ask the right questions, it may be treated as having actual knowledge, and it will all go pear-shaped for the lawyer or accountant. But the illegal arms shipment will have long sailed, been paid for, and deployed)

The issue to consider with your item (a) is

My scrape of the surface (based on what we know so far) is the NZ Foreign Trusts are merely a vehicle to house/contain ownership of overseas domiciled assets. There is no evidence cash actually arrives in-country. I assume the only thing that arrives is documentation showing the acquisition/transfer of ownership of the assets from the settlor into the name of the Trust

There is no reason for money to be shipped in and straight back out, so doubtful the AML provisions apply

You've nailed it actually. Lots of commentators still talk about the NZ offshore trust/company being the repository of some cash, whether for tax evasion or criminal proceeds, whatever. In a few cases, sure, and in the legitimate cases it probably is.

But the ones I'm interested in (and call me stupid, or maybe more gently, naïve, I would have thought more countries would be more interested in too) are the great many of such vehicles that have nothing 'in' them at all. And which are part of a chain (more like interlocked webs).

The NZ vehicle may simply be there to serve as another useful break point, beyond which investigations stop because we don't bother asking beneficial owners; one of the 'benefits' touted by many such firms here and abroad who set them up, perfectly legally.

But when say the overseas professional fronting for the undisclosed client who at the next step or step beyond may be the tax evader or cartel launderer setting it all up may never intend any money here (apart maybe from a drive by purchase of 64 Auckland houses at auction on a whim one month).

If you could follow the links, it might include say Belize, Seychelles, NZ, Delaware and BVI, but the control may be in Mexico, the production in Columbia, the wealth generation from users in US, Europe, AU, NZ, etc, and it may be laundered in NYC/London/Vancouver/Sydney real estate, thoroughbred horses, art, gold, etc.

And from time to time some of it may be repatriated in a blink into pesos (using paperwork generated by said corporate vehicles as above) by trade-based laundering, which is the way to really move the vast fortunes which support the biggest criminal enterprises. TBML is the supertanker of laundering, all the rest is kicking at the tyres of passing cars.

So, no money at all may be parked in a great many of these entities, they may not themselves be the bank accounts as the getaway vehicles.

This is an important point. True tax evasion involves making a structural and transactions so complex that it's impossible to determine if there is a problem at all. The accounts will have transactions but any money will likely just pass through, or actual accounts with funds or financial instruments will be held in an untouchable location. Unless a crime is being investigated it will be next to impossible to investigate anyway.

A point well made Ron.

The uninformed seem to think that there is zillions of dollars cash is going in and out of NZ bank accounts. I suspect in many cases the "Foreign Trust" is just a document and a name used in offshore transactions. Most likely the only money going into NZ bank accounts is the money being paid to those setting up the trusts. Who might be doing this other than lawyers and accountants? Legally of course.

Indeed, as 'dicatator' noted with tax evasion, the NZ vehicle may simply be part of the mirage. Or if it owns something it might be the shares of a Delaware LLC that owns a $10m New York apartment.

 

As well as the lawyers and accountants you mention, trust and company service providers set these things up, of which as I recall there's more than 100)

Ron should be doing the foreign trust enquiry!

Now that's just silly, all I could possibly help with is whether these structures can be used by criminals, and ways to actually counter it. You know, people like this...(sent to me by a vigilant real estate agent) http://www.infojustice.com/Topics/29%20Photos%20of%20Drug%20Lords%20Home...

...and that's not what the review is about, is it?

Yes but if you can't verify the source of the funds you shouldn't be allowing them into the country!!

I know plenty if investment firms(outside NZ)who will not open accounts for companies from the BVI's, Cayman Islands etc because they are unable to get sufficient information on the beneficial owner and/or source of funds.
That is what is so poor with AML checks in NZ. People prefer not to ask too many questions as it might mean turning away business. It will probably come and bite some on the bum in the coming months and years with the leaks from the Panama Papers.

The AML checks here are at least 10 years behind the times in my opinion. I'd be interested to know what you think Ron?

There's a lot to unpack there.

In one sense, that represents AML laws working. If they can't get the info they need, they turn away the business.

Ideally, they also file a suspicious transaction report (STR) too. Though many still don't. A pity really, if it is a lead to take down the crims, in which case even this is just compliance, not effectiveness.

That leads to the next point. Yes, there's evidence some turn a blind eye and don't ask the right questions, presumably in case they might learn what it's really about. Trouble is, it may well come back to bite as you say. Wilful blindness is now sufficient to be deemed knowledge. That means if any professionals (including those under "AML lite" like lawyers, accountants, real estate agents) don't ask questions in the face of obvious red flags, it's not the wet bus ticket of failing to lodge an STR they risk, but complicity in the laundering itself. That's Crimes Act/7 years territory. Nor does it matter if years later. The blue shirts don't mind trawling back over records. Apart from a few quiet prods, they haven't really done this yet though (nor, get this, does NZ even have a dedicated ML enforcement section for this, like duh, it's a licence to hoover up serious crims and all their loot, check out the link in my response to rastus above), but for anyone who cares to look there is already evidence of wilful blindness (and putting on my old hat as a litigator, what seems on its face actionable evidence). And that's even before any of the likely additional treasure trove of leads which may be thrown up by whichever of the 60,000 NZ references ICIJ decide to release.

You're right too (politicians' protestations notwithstanding) that our AML laws plainly and demonstrably don't meet international standards.

But in a funny way this may not much matter, if I'm right with my research and analysis. For a bunch of reasons which already occupy hundreds of pages (and which needs condensing anyway, thanks!) One is that other countries are also out of step, so it's not just about us, but our part in an international hopscotch pattern through which it's pretty easy to skip through. Just look at the ongoing Philippines senate inquiry where overnight $1B was pushed through just one known gap, with $81M getting through. The UK housing market has long been wide open, but our gaps and theirs don't hold a candle to America. Whilst being first to introduce AML laws, forcing the rest of the world to do likewise, smashing with a heavy FATCA fist all American citizens abroad, leading the biggest fines against banks and others, etc, from a modest start as arguably the shell company capital of the world they are now by some measures the biggest global laundry for criminal funds.

You do have to love their honesty though. The US State Department, which unlike others (sorry FATF, and sorry MoJ) actually does try to identify effectiveness, has itself labelled the US a "jurisdiction of primary concern" ie a "major money laundering country".

Another (FATF 'effectiveness' rules notwithstanding) is that the international standards themselves arguably haven't actually made the transition to effectiveness (ie we have rules, but do they actually work? This question hasn't properly been asked, in the sense of the effectiveness/outcomes body of knowledge, although at least FATF is trying.

Third, if my research and analysis is right, that means that our own rules (and those of many other countries) also remain geared to being rules against which compliance is measured, not in which effectiveness is demonstrated.

And there you get to the very reason in a political science policy effectiveness context I chose money laundering as its subject. Notwithstanding massively successful global policy diffusion now encompassing nearly every country in the world (hats off to FATF) by some measures its controls are the least effective of any law enforcement activity, anywhere, ever. (For those interested, this seems the classic outcomes/outputs dilemma which has bedevilled NZ and other countries in terms of policy effectiveness. We measure outputs (standards? yes, tick) not the actual policy outcomes intended (and that's not just whether we stop laundering, that is itself a red herring or perhaps intermediate output towards effectiveness, but have we cut serious crime?). Sorry, that's my passion coming out, but it certainly is an interesting area.

Ron Pol, reputation isn't just one more thing to be exploited. New Zealand has been fortunate in inheriting a pretty good reputation in a number of areas - in probity, in social and environmental areas, etc. But the work that built this reputation is largely that of previous generations.

I don't see the same work in our generation going into maintaining or advancing any of these reputations. In every case, what others worked on is being milked or degraded for short-term gain. And I see the drive to position New Zealand as some sort of offshore centre in just the same light - taking what we've inherited and exploiting it, and so passing a lesser or falsified reputation on to the future.

Sadly, yes. Pity John Shewan. He has to read lots of rules somehow magically to assess the impact on NZ's reputation. Simpler terms of reference might have suggested that he just watch Spanish TV, read the newspapers in Malta, and Google how the rest of the world actually is referring to New Zealand's getaway vehicle manufacturing industry

And, he adds wistfully, maybe tack a sentence on the end of the terms of reference to help reshape the rules to enable the industry to build its reputation for manufacturing vehicles with the world's best criminal immobilisers, built in.

Yes, Ron Pol, there are all sorts of reputations, depending on the points of view of the various audiences. It would be interesting to know what audience the Govt and Shewan have in mind.

I'd like to add that your initial column and subsequent responses have been exemplary - thoughtful and thought-provoking. And good on 'interest' for the platform.

Hey Ron I've spotted the problem, from an earlier thread you said; "my working theory is that all parties are trying to do what's best for New Zealand. You're an idealist. Me too. but you need a healthy dose of scepticism. They're not doing the best for New Zealand, they're doing the best for themselves. If NZ benefits - well they call that collateral effects (in war it's called damage). Helen C, JK Michael C, and many more driven only to look after their own interests and the flow on effects prove this.

:-)

A devious thought

We are told NZ is not a tax haven - well try this example - it's all too easy

A wealthy foreign national - an individual who earns a lot of money in an overseas jurisdiction sets up an NZ Foreign Trust and shifts his foreign earning assets into it. Because the settlor is not a NZ resident, currently resident overseas. Said resident is also the beneficiary of the trust.

Because of the lack of interest in the identity of the settlors and the beneficiaries, the IRD is travelling blind.

Once verything is established and settled down, say one year later, said settlor decides to move to New Zealand, take up residency, and apply for citizenship

Said settlor arrives at the border, fills in the arrivals card in the correct name, per passport

IRD data matches with the Customs arrivals data

Guess what - no match - no hits - no tax to pay - genius

Thanks for the original article Ron and the mostly informed and useful debate from contributors. Not something I find very often on NZ mainstream websites.

And the Police are onto it, announcing just now they've nabbed overseas nationals amongst 41 arrests and $3.8M property seized in a methamphetamine ring. They don't say what prompted the investigation, but if it was a legitimate business lodging an STR when something didn't quite look right, they've just helped stop at least some of the harm caused to the people and economy of the East Coast by the effects of this trade. Probably no offshore trusts involved, more likely entry-level laundering 101, but even at this basic local community level, offshore payments and international flows of illicit drugs are part of the mix.
http://www.police.govt.nz/news/release/successful-meth-bust-gisborne

I think ShonKey(thanks to share trader for that name...like it) needs to kick the regulator(whoever it is) to remind in lawyers,banks etc of there regulatory obligations.

The regulators are the Reserve Bank, DIA and FMA. The intel work is done by the Financial Intelligence Unit at NZ Police, within the Financial Crime Group. Police are also the enforcers (curiously perhaps, there's no dedicated ML unit, but they do have an Assets Recovery Unit which with their colleagues at the Official Assignee are completely flat out rounding up the assets of our local drug dealers and a few fraudsters).

As to banks and lawyers etc:

In many respects (especially as they're only processing financial transactions, so don't have anywhere near the information as professional advisers actually structuring and implementing transactions) the banks are arguably doing a remarkably good job. And they're actively improving systems when they learn of shortcomings.

There's no regulator for lawyers, accountants and real estate agents in this area. They are defined as "financial institutions" in the AML/CFT Act, but were then "transitionally" exempted from any obligations under the Act. They do however remain subject to the old Financial Transactions Reporting Act, which (charitably) might be described as "AML lite". Lawyers also have various ethical obligations to not be involved in criminal activities and to disclose certain activities.

Although there's no AML regulator for lawyers, two of New Zealand's biggest drugs busts appear to have been triggered by Law Society auditors noticing unusual transactions in lawyers' trust accounts. Not bad for a non-regulator! (The Law Society is of course the regulatory body for lawyers generally, and fair to say take a very dim view of anything at all they find untoward in lawyers' trust accounts).

Thanks for your insight Ron. It is very clear the AML rules need tightening up in the property market. IN the UK David Cameron admitted laundered money was inflating property prices in London and has taken action to remedy the situation and it is working. Time for Mr Key to prove he isn't ShonKey.

I see other Mossack Fonseca offices are being raided around the world...but not in NZ