Gareth Vaughan writes to Commerce and Consumer Affairs Minister Kris Faafoi arguing for tougher action over the misuse of NZ companies and our FSPR

Gareth Vaughan writes to Commerce and Consumer Affairs Minister Kris Faafoi arguing for tougher action over the misuse of NZ companies and our FSPR

Dear Kris,

You may not remember but we met briefly in November when you came to interest.co.nz's Auckland office to do an interview with my colleague Jenee Tibshraeny.

I've been encouraged by your start as Commerce and Consumer Affairs Minister. It's good to hear you speaking about improving the lot of New Zealand consumers by giving the Commerce Commission more teeth, and probing the challenges consumers face with petrol prices and supermarkets. I'm also glad you're pushing on with the open banking initiative begun under the previous government.

However none of this is the reason for my letter. Instead I'd like to draw your attention to issues staining New Zealand's international reputation, which in your ministerial capacity you now have the power to do something about.

In a nutshell what I'm talking about is the use of New Zealand registered companies in investment scams, rip-offs and for other dodgy and nefarious purposes overseas. Basically NZ's simple company registration system, laissez-faire oversight of registered companies, and mind boggling foolishness with our Financial Service Providers Register (FSPR), makes NZ companies attractive vehicles for cross border financial scams. (Please note I'm not talking about dodgy behaviour by NZ foreign trusts, highlighted in the Panama Papers and addressed by the previous government through the Shewan report. That's another issue altogether).

I got a reminder of the misuse of NZ companies overseas during the summer holidays when someone sent me a link to an ABC programme on an Australian accountant named Bryan Cook. Because it's an Australian broadcaster, the ABC reasonably focuses on the role of convicted sharemarket manipulator Cook in an international pyramid scheme through which thousands of mainly Chinese investors claim to have lost more than US$1 billion, and a fake internet gambling company that obtained high profile sponsorship deals with European football clubs.

However, what receives scant mention from the ABC is the key role NZ registered companies played in the Euro Forex pyramid scheme and the Power 8 internet gambling scam associated with Cook. Regular interest.co.nz readers will be aware of the NZ links as we've been writing about Euro Forex since July 2015, covered the NZ links to Power 8 in October 2015, and have written about the nefarious activity of Cook associated NZ companies on and off since June 2015.

For your interest, here is the ABC programme.

Despite the involvement of several Cook associated NZ registered companies in Euro Forex and Power 8, including London Capital NZ Ltd which became Asia Finance Corporation, and the use of a Wellington office by staff associated with these schemes, NZ authorities have taken no action to the best of my knowledge.

The picture of Euro Forex promotional material below, featuring a NZ Companies Office logo, was provided to interest.co.nz in 2015.

Cook and associates are, unfortunately, far from alone in the use of NZ companies for criminal and curious purposes overseas. 

Last year several NZ companies, some of whom were clients of local trust and company service provider Equity Trust International Ltd, featured in an alleged US$2.9 billion international money laundering operation known as the Azerbaijani Laundromat. In 2017 we also reported on 11 NZ companies registered by Auckland law firm Cone Marshall that are embroiled in a high level Slovakian financial scandal.

The name Ian Taylor may ring a bell. Taylor and his father Geoffrey Taylor are the company incorporators who helped gift the world the NZ registered company SP Trading Ltd. This is the company that in 2009 leased a plane to fly 35 tonnes of North Korean weapons, including rocket-propelled grenades, missile and rocket launchers, missile tubes and surface to air missile launchers, to Iran in contravention of United Nations sanctions. Fortunately, the weapons never made it to Iran as the plane was forced down while flying over Thai airspace.

It may interest you to know that just before Christmas 2017, eight years after the Taylors' enabling role with SP Trading and those behind it came to light, the Department of Internal Affairs formally warned ECS Ltd, a NZ registered company services provider linked to associates of Ian Taylor, under the Anti-Money Laundering and Countering Financing of Terrorism Act. This was after interest.co.nz exposed ECS Ltd's links to Taylor associates last May.

I could go on and on with examples of dodgy NZ registered, overseas operating companies. And not just ones we've written about, but ones covered by other media, and ones that have courted the wrath of overseas regulators, too. However, rather than providing more individual examples, let's move on to NZ's FSPR, or Financial Service Providers Register.

In March last year the Financial Markets Authority (FMA) told us it had received enquiries about companies registered on the FSPR from 83 countries, and 340 misconduct reports from overseas about companies registered on the FSPR.

For the benefit of clarity the FSPR is like a Yellow Pages for the financial services sector. Anyone providing a financial service such as insurers, banks, fund managers and financial advisers, must be registered on the FSPR, which is operated by the Ministry of Business, Innovation & Employment's Companies Office. The FSPR records the name, address and financial dispute resolution service membership of the provider, along with the services it's registered to provide and any licences it may have.

Trouble is the FSPR is open to exploitation by overseas based rogues and crooks. That’s because a company can register on the FSPR if it has a place of business in NZ, regardless of where in the world its financial services are targeted or provided. This means entities can, and do, set up superficial operations in NZ through virtual offices, or by leasing an office and perhaps employing a person to provide back-office services.

These firms register to provide financial services that don't require licensing in NZ, such as foreign exchange, or forex, services. There's no pre-vetting by a NZ regulator, and they don't offer financial services within NZ. These entities can, however, use their NZ registration overseas to give a false impression that they are regulated in NZ and trade off this country's good name. Euro Forex was one such entity that did this.

Euro Forex's British CEO David Byrne told investors the company EFIL - Euro Forex Investment Ltd was licensed in NZ when it was merely registered on the phone directory-esque FSPR. It's easy to see how this can be confusing for both overseas investors and regulators. If I heard an overseas company was registered on its home country's financial service providers register I too would probably assume this meant it was actually regulated.

The dots on the map below represent the 83 countries from where the enquiries to the FMA came from.

Formed in 2011, the FMA is tasked with regulating NZ's capital markets and the NZ financial services sector. And yet it's forced to waste staff time and taxpayers' money keeping an eye on companies operating overseas that have little, if any, real links to NZ. The FMA recently began publishing warnings about dodgy NZ registered entities in Chinese, Malay and Arabic because these languages represent the regions of the world where the FMA receives the biggest number of complaints from.

The case of Innovative Securities Ltd, which went to court to unsuccessfully try to overturn the FMA's decision to have it removed from the FSPR, highlights the extent to which NZ regulators need to work with international counterparts to combat the cross border regulatory arbitrage practiced by some of these companies. Innovative Securities' tentacles stretched from NZ to the UK, Belize, Hungary, Russia, Kazakhstan, Ukraine, Bulgaria and Uzbekistan.

Now, I want to make it clear that I'm not suggesting the Companies Office, Ministry of Business, Innovation & Employment officials and the previous government stood by and did nothing while NZ company registration and the FSPR were exploited. In fact as you're no doubt aware there are proposals within the Financial Services Legislation Amendment Bill, which had its first reading in Parliament during December, that aim to clean up the FSPR.

I welcome this but am concerned the risk of exploitation will remain, and the waste of FMA resources will continue as staff oversee an FSPR that's outdated and that NZ simply doesn't need. That's why I argued here that I'd prefer it if the Government simply abolished the FSPR. 

You may have noticed I've highlighted several trust and company service providers, or company registration agents, in this letter. That's because they provide a key function as enablers of dodgy companies. Last year I argued that NZ-based company agents should be licensed and questioned why almost anyone anywhere in the world is eligible to register a NZ company. Surely this needs to change.

For example, look at the case of TBA & Associates - Tax Business Advisors Limited, company agent for several of the Euro Forex companies that has untraceable ownership yet remains a NZ registered company. I have also questioned why if a company is deregistered from the FSPR at the FMA's behest because it's deemed dodgy, it's able to remain as a NZ registered company.

And late last year I wrote a three part series about the ongoing headache caused by shell companies and the misuse of NZ companies. This included interviews with international experts about how to tackle the problems. The articles are here, here and here.

But I certainly don't claim to have all the answers. These are complex problems. At times regulators must feel like they're playing whack a mole as they battle sophisticated and resourceful crooks. So perhaps you could appoint an independent person to probe these issues.

 MBIE does appear hell bent on keeping NZ at the top of a World Bank survey where, in terms of the short time it takes and cheap cost of starting a business, NZ's held the number 1 spot for the past decade.

"For starting a business, for example, New Zealand has the smallest number of procedures required (1) and the shortest time to fulfil them (0.5 days)," the World Bank says. It costs $10, plus GST, to reserve a company name in NZ, and $105, plus GST, to apply to incorporate a company.

This is, of course, great for most people who are setting up a company for legitimate purposes. However, it has also led to NZ gaining a reputation for being a soft touch internationally among people who have amoral intentions. Would dropping to, say, number five on the World Bank list for the time and cost of starting a business be a disaster if it meant we stopped more crooks from registering NZ companies?

In terms of an example of action taken to halt reputational damage to a country caused by financial scams, you could do worse than look at Israel and its binary options industry.

As the FMA puts it; "Binary options enable you to make (or lose) money by predicting the short term movements in price of a share, commodity, currency or index. They may promise to make you money quickly, but like gambling, you could lose all of the money you’ve invested. We think binary options are very high risk, even for experienced investors."

In an outstanding series of articles over the past two years Simona Weinglass of The Times of Israel highlighted the vast, amoral global nature of Israel's binary options scams. As Weinglass was undoubtedly happily able to report in October; "The Knesset on Monday unanimously passed a law to ban Israel’s binary options industry, a vast, multibillion dollar scam that has defrauded millions of victims worldwide for a decade...The law gives all binary options firms the intervening three months to cease operations. After that, anyone involved in binary options is punishable with up to two years in jail."

These 'Wolves of Tel Aviv' even made their presence felt in NZ with local financial services professionals discovering their IDs being used without permission by an Israeli binary options firm.

Whether the Israeli authorities manage to halt the binary options scams permanently, or whether some of the scammers move onto another type of scam, remains to be seen. But at least the Israeli government has sent a strong message that this activity is not acceptable and perpetrators will be punished.

In terms of the misuse of NZ companies and our FSPR, I think it's past time NZ's government sent a similar message. And I'm sure there are thousands of duped Euro Forex investors who would agree, including those who appear in the ABC programme.

Yours sincerely,

Gareth Vaughan.

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5 Comments

An important article about an issue that concerns all of us: New Zealand's reputation. 'Reputation' is an intangible object but can be of real value; certainly Kiwis benefit when they travel abroad from the positive reputation our country has. What should worry us all is the fact that reputation is a kind of summary of past actions; it takes a time for a country to lose its reputation but much longer to rebuild it.
I had never heard of the FSPR until this article but two other responsibilities of MBIE are having a similar effect: (1) Granting of visitors visa - for some countries a trivial matter and for others arbitrary, unfair and randomly delayed (2) granting working visas to naive 3rd world students fooled into thinking they will obtain NZ citizenship.
Three issues that risk NZ's reputation. All three responsibility of MBIE. None of the three have destroyed NZ's reputation for fairness and basic integrity. So far the blame is diverted to foreigners miss-behaving as with FSPR documented in this article, exploited foreign students documented in the press and Prof Stringer's report of Widespread Worker Exploitation. The issue with visitors visas is just personal knowledge with the European half of my family and their friends coming to NZ with no trouble (seems to be a few seconds at the immigration counter) and my PI relatives and friends suffering major delays in processing resulting in cancelled air-tickets, postponed courses of study, difficulties with arranging holidays with employers etc. It may be anecdotal but personal knowledge covers about a dozen applications and the attitude of the foreign applicants is firstly not to complain because they suspect they will be victimised on future applications and secondly to blame the matter on the race and location of the staff doing the processing (Fijian Indians and Chinese). I do my best to assure them that it is not an ethnic issue just superlative incompetence by a New Zealand bureaucracy.

Yes. It seems the current supervision setup is completely ineffective. It's hard enough to supervise the folk who try hard to be honest. The system completely misses the point when dealing with those who are dishonest.
Changing a register or redesigning a form does not control crooks, even it they wear suits. The regulator needs to be very aggressive.
You know, hands on, like swat teams and body armour. Otherwise, why bother.

In the same vein as that, and Appreciate it is now history but what about Mr Faafoi’s predecessor(s) for the last nine years? The high speed withdrawal and retreat of all those, suspect at best, trusts once the then government was finally forced to tighten things up, was one highly embarrassing for New Zealand, and the fact of that has never been adequately explained

Nice on Gareth, keep the pressure on.

Seems all pain for very little gain.. I suppose the question is.. who is gaining and how are they influencing the powers that be, from making changes?