Ron Pol cheers John Shewan's report on foreign trust disclosure, says with him exercising the nuclear option the government's choices are now stark

By Ron Pol*

It would be tempting to say you saw it here first. Over two and a half months, the Shewan inquiry into foreign trust rules distilled six main choices (here, at 10.9) into four options applicable when assertions that foreign trusts are “being used extensively [to] facilitate tax evasion, aggressive tax planning [and] money laundering and hiding of assets” were found to be justified (here, at “high level overview”). 

I might claim that the preferred option was much as I had first outlined on Interest.co.nz, way back on 11 April, coincidentally the same day the inquiry was announced. Even that article’s title, “Forget the tax haven semantics and focus on the real issues” was a chilling premonition of Shewan’s conclusion that debates focused on the ‘tax haven’ tag “tend to be futile in throwing light on the core issues or resolving them."

In essence, the Shewan report recommends retaining New Zealand’s foreign trusts regime, but closing out illicit use with meaningful disclosure and a register accessible by authorities. 

To get there, however, John Shewan surmounted the formidable hurdles of his terms of reference, which more recently I described somewhat inelegantly as a “bugger’s muddle of a hot potato hospital pass”. Although I concluded that Shewan “might just be the man to face the core issues anyway”, I must be scrupulously honest, even after the event. I didn’t think, nor dared to hope, that he might go quite so far. 

I have some quibbles about some elements of his report, but it would be difficult to find a better lesson in the art of objective analysis cutting through a sea of bullshit. 

Some experts may have baulked when asked to opine beyond their expertise, as a tax expert ruminating on rules sufficient to maintain the reputation of a country. Bizarrely, the initial expression of his terms of reference seemingly precluded Shewan even considering and advising on options unless he found the rules insufficient to maintain New Zealand’s reputation. 

Others may have taken to heart the government’s unsubtle hints about the OECD giving New Zealand its “highest possible rating” and assertions of “detailed financial and other records” claimed already to be required by our rules. 

Even appointing a tax expert was curious, with the government selection process seemingly captive to one of many misconceptions that the report later dispatched, with much of the media and most politicians at the time distracted by notions that the Panama Papers and NZ foreign trusts were mostly about tax evasion. The Prime Minister had vowed to appoint an “international independent expert”, which suggested instead someone like Professor Jason Sharman, the author of ‘Global Shell Games’ and a world-leading expert in the ways that secrecy vehicles like NZ foreign trusts can be established and misused by unscrupulous actors for illegal purposes. 

As I had perhaps unkindly expressed, Mr Shewan also faced a daunting, tiered array of potential conflicts of interest

In the face of these formidable barriers, and keeping a weather eye on the future prospect of continuing a long career advising the government on tax issues, the ‘safe’ option might have been a long and elegantly worded whitewash. Or, for the bulk of the report to delicately navigate through the barriers. Instead, Shewan simply ignored the lot, and got on with the job at hand. 

New Zealand’s foreign trust disclosure rules were bluntly declared “inadequate” and “not fit for purpose”. Dealing with the assertion of “illicit funds being hidden in New Zealand foreign trusts”, it was frankly accepted as “reasonable to conclude that there are [such] cases”. It is indeed likely that “the [foreign trusts] regime is facilitating the hiding of funds or evasion of tax”. 

Arguably having stepped beyond his expertise even to offer such opinions, Shewan strode onwards, venturing unperturbed into the esoteric areas of anti-money laundering regulations and practice, and into the political science arena of policy effectiveness. 

For over a month, I had seemed alone in my own small craft on a vast sea of powerfully co-ordinated rhetoric proclaiming some magical fix, until the Shewan report also laid waste to the red herring that extending anti-money laundering controls to lawyers would somehow address the dark side of New Zealand’s foreign trust regime which operated as a criminal getaway car manufacturing plant. 

“In theory”, says Shewan, the “anti-money laundering rules should ensure that funds held by foreign trusts are from legitimate sources”. But then there’s reality. “Under current law and enforcement practices the risk of detection by authorities is low”. Combined with a slew of new registration and disclosure requirements, Shewan also recommended changes to anti-money regulations and practice. Having disregarded serried ranks of barriers, Shewan ignored also the seemingly proffered array of blandishments. Ducking few issues and declining to paint a rosy picture, his report might accurately be described as hard hitting. To say the least. 

In doing so, Shewan has handed the conundrum back to the politicians. In spades. The government elected not to make a choice earlier, to close down the obvious dark side of New Zealand’s foreign trusts regime on its own terms before the International Consortium of Investigative Journalists released some of the data from the Panama Papers. Notwithstanding its interim reaction yesterday to apply considerable ‘spin’ to the report, the government now has another opportunity to make a choice. 

With Shewan having exercised the nuclear option, however, the government’s options now seem rather more stark than before.

Scorched earth is all that remains of the myths, half-truths and blandishments behind which, until yesterday, any number of mealy mouthed options might have been found. Soothing sounds bereft of substance will now echo more loudly. 

Having long suggested a more nuanced approach than suggested by either the government or Labour – of retaining our foreign trusts regime, but closing out illicit use with meaningful disclosure and a register accessible by authorities – from a policy effectiveness and crime prevention perspective, naturally, I favour the government simply accepting and adopting Shewan’s recommendations. 

Done well, notwithstanding Shewan’s predicted contraction of the foreign trusts industry, it might even be possible for ‘NZ Inc’ eventually to gain competitive advantage with a new ‘clean’ version of foreign trusts. As suggested here earlier, the ‘made in New Zealand’ badge could become a world-recognised reputational quality mark for (legitimate) offshore trusts and companies crafted by professionals in what could become a world-leading hub for facilitating confidential (legitimate) dealings.  

An alternative choice is to meet fire with fire. If the government remains steadfast, the ‘Erebus option’ offers precedent for dealing with a particularly robust inquiry. But that didn’t end so well, for anyone. So, it’s hard to imagine anything less than orderly transition towards effective implementation. But clearly I still have much to learn about political science. Why the government has so staunchly defended the status quo, in the face – or so it seemed to me at the time, and now Shewan – of clear and obvious risks, readily soluble, has long escaped me. Likewise, I have no idea why the government might now want to maintain the dark side of New Zealand’s foreign trusts regime. So, surely, the bit that enables and facilitates serious crime will be 'gone by lunchtime'. Maybe.

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*Formerly a lawyer in New Zealand and the UK, Ron Pol is a crime prevention and money laundering specialist with AMLassurance.com. He is completing a political science doctorate on money laundering, crime prevention and policy effectiveness, with particular emphasis on more effective ways to cut the money laundering risks of lawyers, accountants and real estate agents.

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15 Comments

No, that can't be right. John Shewan is a stooge mate of John Key's, appointed only to deliver a whitewash and get the Government off the hook. I know this because Andrew Little and many other interest commenters have told me so.

Everyone knows the govt policy of denial, lie and when the heat is too obvious to deny and lie, they try to delay the truth as long as possible or do whitewash through friends and agency under them.

Thankfully now are totaly expsed but funny part is that they have still to realise that now no one cares what they say as everyone has doubt on their intention. Trust defict has hit rock bottom and arrogence has made them immune to the feeling of people. I mean people of NZ and not their foreign friends, for whom they are working.

Now just wait for the new non residence buyer data that will be announced in next few months unless they goof up to please national party bosses.

Was just talking to a friend yesterday and he said out 15 properties sold through his office 11 are chinese sounding name. Labour was right when they said about 38% but today is much more.

Do you know Shewan 's background? Questioning the appointment was fair. And Key only said "some" of Shewan's recommendations will be adopted. Not "all", some.

Shewan is ex PwC NZ chair. Long advised government on tax issues. Highly regarded, rightly so. All the PM said when appointing him extolling his tax/trusts expertise true.

I said more here: http://www.interest.co.nz/opinion/82143/ron-pol-explores-barriers-and-opportunities-facing-shewan-%E2%80%98review%E2%80%99-nz-foreign-trusts

how many times now has JK said he does not agree with experts.
he will do what is best for himself and the national party over what is best for the nation
. we know this and to expect different is just chasing shadows

You may be right. Having adroitly repositioned seemingly to be able to run whatever the result of the inquiry (as I suggested here), the 'spin' subsequently seems inconsistent with, even partly to undermine, that positioning. So, it may well prove me wrong, and you right.

No connection, really, and writ far larger than this issue, but the UK rejected experts too, amidst a 'debate' characterised by political positioning almost completely disconnected from any concept of reality, on both sides. Experts should seldom drive policy (it worked for a time in Italy, but was perhaps a special case). That truly is politicians' role. But when the disconnect grows large, a time for concern? Certainly, considerable interest how it all unfolds...

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More than a little credit seems due to Gareth Vaughan at interest.co.nz for staying with a subject that most New Zealanders, including me, do not fully understand, such that the mainstream media was unlikely to bump Bachelor stories off the front page to cover it.

Clearly, the Gubmint cannot just keep drinking the handwavium....

So if NZ sticks it too the foreign trusts won't you just encourage those people to come and live here in NZ and have a residents/citizens trust??? Often times people whinge for a change and we find that something worse comes along!!

Figures bandied around NZ often indicate that 90 to 95% of those who are based in NZ with Trusts have sham Trusts..........I am all for being a "Naked Entity" but people end up forced to use Trusts to keep the prying sticky beaks of bureaucrats out of their lives.....and funny thing is Constitutional Law never sees the light of day!!!

The driver  to establish a foreign trust is completely separate from NZ. We just offer the vehicle. The vast majority will care not a jot about NZ. The reasons for domestic trusts differ, typically to own a house or somesuch, and a connection with local assets. There is no such connection with NZ foreign trusts. The assets are offshore, as are settlors and beneficiaries. The only connection is the local lawyer or tax accountant to whom fees are paid. Fees might be paid to those administering secrecy vehicles likewise in say Belize, Panama and Delaware, but the intention ever to visit any of them is likely nil.

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Something doesn't add up to me in all this.
On the news we are being told by Bentleys, Mossack Fonseca's NZ agent, that the recommended changes will make little difference to their business. What is the motivation for their clients if it is not to evade some legal requirement in their own country? Why go to all this trouble otherwise? If Bentleys claim is correct then it seems likely that while John Sherwen appears to have addressed the issues, he may well have delivered a very cleverly crafted whitewash that will not change anything materially for all but the worst abuses. This is probably exactly what the government wanted - appear to satisfy the criticisms while not really changing anything.
When considering this government I think that it is impossible be too cynical.

Hi Chris-M, great observation. If all recommendations implemented effectively, and volume drops away it may be an indicator of extent of misuse. If volume keeps climbing, either (a) there wasn't much misuse, thus unaffected, and/or (b) the drop off in criminal misuse is offset (to more or lesser extent) by a new client base, attracting legitimate users sick of being tarred with the same brush as crims. It's a little more complicated than that, with multiple variables, but the best way to really know would be to develop and implement a robust methodology for testing it, scientifically sound, leading into and after implementation.

I agree with you Ron. Mt Sherwin has hit the key issues in the bullseye. I was very skeptical of his appointment, however on reading his findings I am now very impressed. Boom - not fit for purpose, enable money laundering and aggressive tax practices, damage NZ's reputation...regime needs to be changed. No soft soaping or watering down here, he's really done a great job. Nowhere to hide for the government now.

It will be interesting to see how the government of the day handles the inevitable inter-relation between disclosure regimes for foreign and domestic trusts.

There are a lot of domestic trusts, and they are likely to have voters for settlers as well as voters for beneficiaries.

It's all very well lining up foreign trusts, but domestic trusts? That might prove a very hot political potato.

Thanks again to the Interest.co team. It's a pleasure to be able to get real news and incisive analysis. I, possibly like many others, had a jaundiced view of John Key's choice of 'expert'.

Having read this article, I understand a lot more now.

Even though I am, at times, at odds with some of your commenters, your platform gives real debate.
As an ex-patriate New Zealander I thank you.