Thursday, September 29 2022

AEndangered birds, abnormally large sheep and, in popular imagination, hairy-fingered hobbits, New Zealand is a haven for another curious specimen: the illicit flow of offshore finance. The world’s fraudsters and tax evaders are funneling funds through the Pacific island nation at a pace quite at odds with its unblemished and highly ethical global image.

New Zealand’s latest attempt to match reality with reputation came late last month, when Trade Minister David Clark pledged to introduce a publicly accessible register that would list beneficial (“beneficial”) owners of New Zealand-based businesses. Such a move would represent a form of catch-up – Britain has had one since 2016 – and has long been advocated by global bodies such as the Financial Action Task Force (FATF).

Much of the international fraud relies on what is known as the “fictitious game”, in which income and assets are funneled through a series of interdependent shell companies, partnerships and trusts. The goal is to keep the true owner of the wealth secret, so that anti-corruption agencies and tax authorities cannot trace their bribe payments or force them to pay taxes. This is why many global bodies now refer to ‘secret jurisdictions’ rather than ‘tax havens’.

Organizations like the Tax Justice Network have found New Zealand to be a player, albeit a small one, in the covert offshore finance market. Official analysis shows that at least $1.35 billion in money laundering revenue is generated in New Zealand each year. Importantly, authorities have no idea how much money is funneled into or through the country by global fraudsters using companies registered in New Zealand.

According to a 2021 FATF report, these fraudsters are using the country’s reputation as a “well-regulated jurisdiction” to disguise their activities. Local company reports are replete with stories of foreign investors who have invested their money in New Zealand-registered vehicles, believing this warrants a high degree of control – only to find out otherwise.

Some of the problems stem from the pro-market reforms of the 1980s, in which “light” regulation was one of the dominant mantras. The country likes to brag about being number one in the World Bank’s “ease of doing business” survey. The flip side, according to the FATF, is that its companies are exceptionally “vulnerable to abuse” because the cost of creating them is kept low in part by regulators who do so little due diligence.

In a statement, Clark said his registry project will “go a long way” to improving corporate ownership transparency.

The registers are not flawless, however. If New Zealand follows practice overseas and defines a beneficial owner as someone with 25% of a company’s shares, five people could own 20% each and not declare any of their names. And except where there are major “red flags,” officials don’t offer to verify whether those registering are indeed the beneficial owners of their companies.

New Zealanders also make extensive use of family trusts. These are arrangements in which an individual (the ‘settlor’) has in theory set aside assets for trustees to manage on behalf of others – but in practice still often controls the assets. Family trusts have been used to avoid tax and hide assets from creditors and ex-spouses.

New Zealand’s four million adults have set up between 300,000 and 500,000 of these trusts – but no one knows the true figure, as they don’t need to be registered. If, under Clark’s proposed law, a trust is the beneficial owner of a company, it will have to disclose the names of the trustees – but not the settlor, which trade commentators say will leave a major void in the transparency.

There are concerns, however, that the proposed register could be weakened before it reaches the statutes, based on New Zealand’s recent efforts to tackle corruption. Michael Macaulay, professor of public administration at Victoria University of Wellington, points out that “every time we ended up with a watered down version or nothing at all”. He cites an abandoned attempt to create a lobbyist registry, a bill that fails to properly support whistleblowers, and anti-corruption laws that still allow bribes in certain circumstances.

New Zealand’s complicity in international fraud was also revealed by the 2016 Panama Papers, in which illicit global wealth was shown to be hidden by its “foreign trust” regime. This allowed foreigners to place assets in New Zealand-based trusts but were not required to disclose information about their activities. These trusts have been caught up in scandals ranging from the multi-billion dollar Malaysian 1MDB fraud to the notorious Brazilian “Lavo Jato” (“Carwash”) corruption case.

Commentators began to describe New Zealand as a tax haven and even, in the words of the director of the International Consortium of Investigative Journalists, Gerard Ryle, “a soft touch”. Baffled by such criticism, the government has cracked down on the foreign trust regime, requiring far more information to be shared with tax authorities and cutting the number of those registered by three-quarters.

Many weaknesses remain, however. FATF’s 2021 assessment highlighted vulnerabilities, including “major” risks caused by failure to properly regulate named directors and shareholders, who often hold – or hide – assets on behalf of others . Illicit activities were carried out not only by shell companies, but also by trusts, the working group found, urging that the latter be registered as well as the former.

New Zealand would be well advised to act on these issues, as global public opinion continues to turn against secretive states and the illicit activities they enable. The so-called transparency paradox applies, however: greater openness can improve a country’s reputation in the long term but hurt it in the short term, as the scale of wrongdoing becomes apparent. New Zealand has not wanted to run this risk in the past; no one should be too confident that they will in the future.


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