Ron Pol explores barriers and opportunities facing the Shewan ‘review’ of NZ foreign trusts

Former PwC Chairman John Shewan

By Ron Pol*

The so-called Shewan review of NZ foreign trusts is now expected ahead of its 30 June deadline (NBR, paywall).

‘Review’ may be a misnomer (as outlined below), but whatever its findings, it should be interesting to see how Shewan resolves the bugger’s muddle of a hot potato hospital pass he’s been handed.

Government’s ‘Shewan sidestep’ no impediment

Shewan has the expertise claimed, and then some, and his integrity is second to none. Nor, as far as I can tell, does he suffer the ‘ego-collosus’ of some of his peers, so I reckon he won’t much care that he was chosen after the Prime Minister said that an “international ‘independent’ expert” would be selected.

Even aside from the ‘international’ and ‘independent’ requirements, Shewan may have been surprised to receive the call, if like others he thought the ‘expert’ element would be in the ways that secrecy vehicles like NZ foreign trusts can be established and misused by unscrupulous actors for illegal purposes. Perhaps someone like Professor Jason Sharman, who with other top academics conducted the world’s leading research in this area and (literally) wrote the book, ‘Global Shell Games’. But the scope of the review was the government’s call. Not Shewan’s concern.

Shewan’s first hurdle: when a ‘review’ is not a review

Something that Shewan has had to grapple with, however, were his terms of reference. These enable him only to review our foreign trusts rules if he finds – in an area outside his expertise, on which the government has repeatedly said is not the case, and against the strong admonitions of the terms of reference itself – that existing disclosure rules are not sufficient to ensure the maintenance of New Zealand’s reputation. From the outset, the ‘safe’ option appeared destined to force an elegantly worded whitewash.

If he manages to get past this conundrum, Shewan may venture into areas in which he does have expertise, and may even be able to conduct a meaningful review.

Multiple conflict hurdles: disclosure will at least help

The tiered array of conflict hurdles Shewan must then overcome, or at least disclose, are daunting.

Shewan has long helped the government on matters of tax policy and legislation. It may be difficult (or may be perceived so) for someone effectively an insider to make independent findings contrary to existing policy settings, particularly in areas in which Shewan or his former firm, PwC, may have been actively involved. The difficulty would be particularly acute in relation to any such advice involving the operation of New Zealand’s foreign trusts regime itself. Shewan will presumably disclose any such issues, so that his report may properly be assessed in full knowledge of any such potential influences.

Mossack Fonseca also worked with more than 14,000 intermediaries in setting up corporate vehicles throughout the world, so it is reasonably likely that Shewan or PwC had dealings with them, whether in relation to the establishment or operation of NZ foreign trusts or other corporate and ownership vehicles of a similar nature in New Zealand or elsewhere. If so, this too may be disclosed.

More significantly, however, like many of the big legal and accounting firms, PwC itself will likely have been involved in setting up or administering NZ foreign trusts during Shewan’s career as a partner and chairman of PwC. Almost certainly, the firm will have advised many clients regarding a wide range of transactions and other circumstances involving NZ foreign trusts and similar corporate and ownership vehicles. If Shewan or his firm was actively involved in the foreign trusts industry, it may be difficult (or perceived so) to draw adverse findings regarding activities involving the firm and its clients’ interests.

Moreover, there is a body of research suggesting hidden risks. Even in the knowledge of potential misuse by those who ultimately own and control such vehicles, professionals may rationalise their own actions and behaviours establishing such vehicles within the confines of an overriding self-belief of propriety. Almost by definition, few of us have the insight to recognise our own subconscious biases. I acknowledge that I can offer little in this complex area, so return quickly to the comfort of firmer ground, and suggest only that if Shewan or PwC during his time as partner and chairman were associated with NZ foreign trusts or similar secrecy vehicles, the report might at least disclose any relevant facts accordingly.

Likewise, it is difficult in a brief article adequately to assess the impact, or even the relevance, if any, of international developments, but PwC itself has long been involved in establishing and advising in relation to what might be described opaque ownership and corporate structures which share characteristics associated with NZ foreign trusts.

In the UK, for example, parliamentarians have accused PwC of creating ‘extraordinary’ structures ‘to avoid tax, of promoting tax avoidance on an ‘industrial scale’, and giving ‘misleading evidence’ (denied by the firm) about those activities. In a curious twist, before they released the ‘Panama Papers’ the International Consortium of Investigative Journalists was involved with the earlier ‘Lux Leaks’, in which former PwC employees and a French journalist helped expose what have been termed ‘dubious practices’ allegedly involving ‘industrial scale tax avoidance schemes’ within PwC’s sprawling Luxembourg office.

PwC Luxembourg and PwC UK are presumably separate, in legal terms, from PwC New Zealand. To suggest that this indicates comprehensive separation would, however, be disingenuous. The inconvenient truth is that they share a common brand, and may share some systems and practices. Nonetheless, whether these issues have relevance, or not, is at best problematic, not least because they involve complex and disputed issues. In any event, they are matters of public record, readily available for commentators to assess as appropriate, so it may not be necessary for the report to disclose them.

Credible only if findings contrary to government’s apparent intention?

If any of these various potential conflicts are material, it might be suggested that Shewan’s report can only be credible (or perceived as such) if it finds against the government’s ‘guidance’, as forcefully if not clumsily expressed in the terms of reference, parliament and media. Shewan, however, is no-one’s ‘yes man’. He may well make his own call, irrespective of any such ‘guidance’.

Political repositioning

Moreover politically the government appears now to have positioned itself as being open to the very change it had steadfastly resisted in relation to New Zealand’s foreign trusts regime. This repositioning has been notably more astute than the initial terms of reference, and largely unconstrained by opposition or media scrutiny. With the opposition distracted by seemingly ill-advised skirmishing on peripheral issues, the Prime Minister began claiming that the government was “open to making changes”, and the Police Minister canvassed a public register of beneficial ownership and control of companies. John Key continually repeated the new mantra that change would be made “if necessary”, and yesterday the Revenue Minister hinted at “stronger rules on the way”.

Of course, the review might just do some 'finger pointing' and leave the core issues unchanged. For example, the IRD might be faulted for not following up if as might be expected some of the limited reporting by foreign trusts wasn't done by all of NZ's foreign trusts. Along the lines, "the rules were there all along, but IRD didn't do their job". I'm no apologist for IRD, but that would be a bit rich. The legitimate users might file a basic return when required, and even some of the criminal users might do so (filling in a meaningless form ain't too difficult, and all the better to stay under the radar). But if the Sinaloa cartel used an NZ foreign trust in one of its complex ownership structures or transactions, and wrapped it up two days later, severing ties too with whatever legitimate service providers their cover service providers used along the way, they won't much care. And even if now like the rest of the world IRD actually knows his whereabouts, they're not about to call. "Dear Mr El Chapo, you seem to have forgotten to fill out our almost completely meaningless form so we could tick a pointless box." Nor will the lawyers know anything more. And when the cartel have another transaction, they'll establish another. Like, duh. That's what invisibility cloaks are for. Single use, discard. The criminal cash is what get's laundered, not the cloak. So if this is what happened, it's likely not so much the form collector as the policy settings that created the situation. Anyway, we shall see.

Either way, whether Shewan suggests substantive changes or just affords the ability for politicians of any party to indulge in finger pointing, the government appears deftly to have secured itself the best of both worlds, at least politically. With scant debate or consideration of the actual issues themselves, by government or opposition parties, the government now appears well positioned, politically, whatever the result of the review.

Interestingly, from terms of reference which aggressively restricted options, and circumstances resembling a can of worms tossed into a minefield for Shewan to retrieve, the government may now be perfectly relaxed with either the status quo thus far vigorously defended, or pretty much any change he may now care to suggest.

Can he do it?

With a few notable exceptions, the relative scarcity of informed or critical scrutiny of the core issues by opposition parties or much of the media appears to have enabled the government to reposition to a state where, ironically, even without troubling itself to address the core issues, it may be able to inflict more political damage by embracing the change it has long resisted than maintaining the status quo. The government’s political strategists may regard this a bridge too far, but either way, Shewan’s report should be interesting, on several levels.

From a political science perspective, the politics has been fascinating, but in terms of policy effectiveness and what may be best for New Zealand the real test will be – despite seemingly insurmountable barriers and conflicts, and a lack of meaningful debate on the core issues – whether the report itself actually seeks to address the substantive issues.

In short, our foreign trusts regime currently offers an invisibility cloak for foreigners to use New Zealand to hide their activities, whether for legal or criminal purposes. The solution is a simple one. We have complete control of the design of our criminal getaway car manufacturing industry, and we have already made adjustments to prevent Australians using New Zealand to evade taxes. Will Shewan suggest that we factory-fit criminal immobilisers across the board?

The odds appeared stacked against it. Proof of the adage that a week is a long time in politics, in little over a month the odds have shortened, and turned. But even if they hadn’t, Shewan might just be the man to face the core issues anyway. We shall see. And now, it seems, sooner than expected.


Disclosure: I interacted professionally with John Shewan when I managed litigation for the Telecom Group, mostly in relation to Telecom’s contingent liabilities (PwC was Telecom’s auditor). Professor Jason Sharman is currently my principal PhD supervisor. Neither was aware of this article before its publication. The opinions expressed are solely my own.


*Ron Pol is a crime prevention specialist with AMLassurance.com. A former lawyer in both NZ and the UK, and legal business consultant, Ron is completing a political science doctorate on policy effectiveness, crime prevention and money laundering.

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21 Comments

UPDATE: Swiss detain suspected Mossack Fonseca leaker

http://www.reuters.com/article/us-panama-tax-geneva-idUSKCN0Z11KR

(IT worker at Geneva office accused of removing large amounts of data, but no evidence at this stage the detained man was responsible for the 'Panama Papers' leak revealed in April)

 

What is of interest here is that an international law firm assisting individuals to avoid the laws and accountabilities of their own country, or just facilitate illegal activities and the biggest criminal is the individual who made this information public?!! This reaction just demonstrates why these whistle blowers are so important - money and power will move to protect their own interests at the expense or the the rest.

Whistleblowers certainly face a rough time. As MossFon pressed charges in Geneva, PwC did with the LuxLeaks whistleblowers. Understandably neither firm happy their secrets were exposed, so the interesting thing indeed is how different legal systems deal with any criminality by the whistleblowers' actions and by any such hitherto secret actions exposed.

There is perhaps a built-in inequity too. Whistleblowers' actions may be directly and easily actionable, whereas leaked documents may not meet evidential requirements in many countries even if they demonstrate serious crime because of how they were obtained.

One of the reasons perhaps why any real fallout from Panama Papers will come only after years of investigation by enforcement agencies that actively use intelligence leads to generate actionable evidence. The Canadian and Israeli tax authorities have started this process, and apparently US enforcement agencies too.

It's agencies like that who actually roll their sleeves up who are serious about organised crime. If they can track it (no easy feat), countries who sat on their hands thinking it had all gone away may be in for a nasty surprise if found to have shielded some of the world's worst criminal gangs, or terrorists. The real stories may not come out for some time.

Looks to me we don't need a review but a law change. If people can register trusts here - without disclosoure of the beneficial owners of the assets deposited into those trusts - we have a legal vehicle for international money laundering and tax evasion.

NZ should not allow this, John Key and Bill English should have never tried to defend it and enable it to keep going. It's a disgrace and an affront to every honest person in NZ. The review is poltical smoke and mirrors to get this horrible embarassment for NZ off the the front pages of the media.

Agreed. If it's obvious that the current rules create a perfect vehicle for criminal misuse, and if it's agreed that that's not so flash, and the solution is fairly obvious, there was indeed no need for a review (or as some call for an inquiry). It may not even need a law change to implement, just a quick tweak of the existing rules to close out the criminal elements, enabling legitimate use to continue.

And on the hunt for international organised crime groups, we could have saddled up with the FBI/IRS/DOJ to help flush out any criminals using our version of invisibility cloak for improper purposes, rather than in effect giving the US & nearly every other country in the world the finger by staunchly defending the right for legitimate users and the world's criminals alike to use NZ to hide their activities, all while we twiddled our thumbs waiting for a review and held the barn door open for any remaining horses to do what they do...

I'd love to see that Ron, us join the hunt for the criminals using these vehicles. I think you're right also about an inquiry. I'd like to see a Royal Commission on this, to flush out the political toads that enabled it.

When I do business overseas, I don't want people saying...."oh you're from NZ"....them knowing it's a money laundering and international tax haven like the Caymens.

rp, my own guess on "the political toads that enabled it" is that neither Labour or National intended it to be a getaway vehicle for criminals. As a country we become complicit only when we know about it, or should know about it, and do nothing.

From a political science perspective, that's the interesting point in time which, together with subsequent events, helps decide if this issue one day qualifies for our own chapter of something like the classic King & Crewe book compulsory reading for every good politician http://amzn.to/25YT9vf

it is something extremely detrimental to NZ, as you say in your title, reputation...I'd like to see some kind of public process that ensures it doesn't happen again.

So, rp, what onformation should be collected, how should it be verified, and which parts should be public?

Well, a classic MBA case-study way of dealing with intractable situations like entrenched corporate cultures, is to simply fire 10-30% of the staff. Any slice will do: the key is to make a very visible 'unfreezing' action.

Transmogrified to the foreign trusts arena, an equivalent would be to summarily disestablish some fraction of the aforesaid getaway vehicles, by a regulation, order-in-council or other thoughtfully provided legislative swiftie mechanism.

Then invite all thus affected to re-apply for new entities, under tightened rules. It will generate NZ revenue both going (as the disestablished entities lawyer up) and coming (as they dribble back, very possibly in much reduced numbers).

To be sure, there would be collateral damage. But isn't that preferable to the current situation?

nice Waymad, make the clean up an earner for NZ by charging those involved in it

Ron Pol could possibly answer one question.
If a NZ based trust is just one apparently legal entity in a chain of external and probably illegal or criminal ownership, does that implicate the NZ trust regime?

Short answer, yes, I believe it does.

The current design of NZ foreign trusts is what makes them an excellent vehicle to hide legitimate or criminal activity. Nor will any criminal assets ever be 'in' NZ as many seem to think. As an opaque ownership vehicle, the NZ foreign trust is more likely part of a chain of similar vehicles across multiple jurisdictions offering much the same, and across multiple service providers likewise (which is why MossFon itself is a red herring, as not even the speck on the tip of the iceberg).

So, if a Mexican cartel (or the, probably, Chinese criminal gang responsible for supplying the $500M worth of methaphetamine found in Northland) invests its latest $1B into Manhattan, London and Vancouver real estate to expand and facilitate its continued business operations, it may be owned through a latticed web of NZ, Belize, Seychelles, Panama, Delaware and Nevada secrecy vehicles. Each layer shrouded in secrecy, no service provider knows the full picture, nor even the transactions undertaken (which is why extending AML to lawyers is a red herring that will make hardly any difference), and criss-crossing jurisdictions make it hard if not impossible for enforcement agencies to track (which is why doing nothing makes us part of the problem, and even if we do tack on a criminal immobiliser to stop future criminal misuse, what's the bet we don't also lift the bonnet to see what has been and may still be going on...).

Transparency International say we're implicated. They have us on a dirty shortlist.

Full truth if out will be very bad. Time to review and do thourough enquuiry to bring the truth out and clean the system as their will always be shadow of doubts and have to come clean.

Mist countries are revewing tger system and where needed doing changes. Iis dojng NZ dojng enough.

Stupid headline

I can't blame the Interest editors for that. I suggested the primary and secondary headlines myself. I'm guessing it's the former you don't like (the latter being merely descriptive)?

My intention for the primary headline "Has NZ's reputation been damaged enough?" was simply keyed into the trigger mechanism in the terms of reference itself. Only if he finds NZ's reputation is affected by our foreign trust rules is Shewan asked to actually undertake any meaningful review.

So, perhaps your dislike of the headline is an indicator itself usefully flagging the quite bizzare nature of the terms of reference themselves.

Personally, I'm rooting for John Shewan to get past such bizarre strictures (which should be easy enough anyway), and opine sensibly. [Curiously, it now seems from their latest hints that the government is either perfectly relaxed with that, or perhaps he's flagged to them already he's going to do so, and they're just positioning the comms accordingly].

What is a business?
An invisible entity removed physically from scrutiny, other than the revenue-gathering front-end, and no legal accountability?
Perhaps the only remedy is to only do business with locally owned and operated small businesses.

A benchmark to compare the Shewan Report to

Keep up the good work Ron Pol - we need the sunlight
Darkness is their friend. The sun never rises. You will never know - it's un-measurable
You want to see the scale of it? How its done?
This Four Corners Investigation was broadcast April 2016 before anything was revealed here in NZ
http://www.abc.net.au/4corners/stories/2016/04/04/4434529.htm

It's a reputable investigator
Their report will be a benchmark to compare the Shewan Report to
If you have any lingering doubts watch the video - it's the best you are going to get here in NZ - nobody else is going to do it

Thanks 'two otherguys', that Four Corners piece remains one of the best. Finding reasoned, rational discussion here has been difficult (Interest, and individual journos elsewhere, excepted). A few extracts from that, relevant here, summarised:

Jack Blum: The corporate use of this system protects the criminals who use the same system. Corporations say it's legitimate, the OECD allows us to move profits around to minimise tax. Criminals also hide their money and avoid detection using the same secrecy system. James Henry: They are using the best such structures anywhere in the world, not just Panama.