When it comes to international financial fraud, New Zealand is far from squeaky clean | Max Rashbrooke

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AEndangered birds, unusually large sheep and – in the popular imagination – hairy hobbits – New Zealand is a haven for another odd specimen: the illicit flow of offshore finance. The world’s scammers and tax evaders are channeling funds through the Pacific island nation at a rate at odds with its squeaky-clean, highly ethical global image.

New Zealand’s latest attempt to bring reputation back to reality came late last month when Trade Secretary David Clark promised to introduce a public register that would list the real (‘useful’) owners of New Zealand-based companies. Such a move would represent a form of catch-up – the UK has had one since 2016 – and has long been called for by global bodies such as the Financial Action Task Force (FATF).

Much of international fraud relies on what is known as the “shell game,” where income and wealth are channeled through a series of interconnected “shell” companies, partnerships, and trusts. The aim is to keep the true owner of the assets secret so that anti-corruption agencies and tax authorities cannot track down their bribery payments or solicit them to pay taxes. For this reason, many global organizations now speak of “secret zones” rather than “tax havens”.

Organizations such as the Tax Justice Network have noted that New Zealand is a player, albeit a small one, in the clandestine offshore finance market. Official analysis shows that at least $1.35 billion in money laundering revenue is generated in New Zealand every year. Crucially, however, authorities have no idea just how much is being funneled into or through the country by global scammers using New Zealand companies.

According to a 2021 FATF report, such scammers use the country’s reputation as a “well-regulated jurisdiction” to disguise their activities. Local business news is rife with stories about foreign investors who have put their money into New Zealand-registered vehicles, believing it offers a high level of control – only to find something else.

Some of the problems stem from the country’s pro-market reforms of the 1980s, during which “loose” regulation was one of the dominant mantras. The country likes to boast of being ranked number one in the World Bank’s Ease of Doing Business survey. The downside, the FATF argues, is that its companies are unusually “vulnerable to abuse” because the costs of incorporation are kept low, partly because regulators exercise so little due diligence.

In a statement, Clark said his proposed register will “go a long way” in improving transparency of company ownership.

However, the registers are not error-free. If New Zealand follows overseas practice and defines a true owner as someone with a 25% interest in a company, five people could each hold 20% and not provide their names. And barring major “red flags,” officials don’t suggest checking whether registrants actually are the beneficial owners of their companies.

New Zealanders also make extensive use of family trusts. These are arrangements where an individual (the ‘settlor’) has theoretically made assets available for trustees to administer on behalf of others – but in practice often still owns the assets. Family trusts have been used to avoid taxes and hide assets from creditors and ex-spouses.

New Zealand’s four million adults have set up between 300,000 and 500,000 such trusts – but nobody knows the real number because they don’t have to be registered. Under Clark’s proposed law, if a trust is the true owner of a company, it must disclose the name of the trustee – but not the settlor, which business commentators fear will leave a major transparency gap.

There are concerns, however, that New Zealand’s recent anti-corruption efforts will weaken the proposed register before it actually enters the statute books. Michael Macaulay, professor of public administration at Victoria University of Wellington, points out that “every time we’ve either gotten a watered down version or nothing at all.” He cites an abandoned attempt to create a register of lobbyists, draft legislation, who do not provide adequate support to whistleblowers, and anti-corruption laws that still allow bribes in certain circumstances.

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

Commentators began to call New Zealand a tax haven and even, in the words of International Consortium of Investigative Journalists Director Gerard Ryle, “a gentle touch”. Alarmed by the criticism, the government cracked down on the foreign trust regime, demanding far more information be shared with tax authorities and cutting the number of people registered by three quarters.

However, several weaknesses remain. The 2021 FATF assessment highlighted vulnerabilities, including “major” risks caused by a failure to properly regulate nominee directors and shareholders, who often effectively hold – or hide – assets on behalf of others. Illegal activities were carried out not only by shell companies but also by trusts, the taskforce found, urging the latter be registered as well as the former.

New Zealand would do well to act on these issues as global public opinion continues to turn against secretive states and the illegal activities they enable. However, the so-called transparency paradox applies: More openness can improve a country’s reputation in the long term, but damage it in the short term, since the extent of the misconduct becomes visible. New Zealand has not been willing to take that risk in the past; No one should be too confident that this will be the case in the future.

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