Aendangered birds, abnormally large sheep and – popularly – hairy hobbits, New Zealand is a haven for another curious pattern: the illegal flow of offshore finance. Global tax fraudsters and evaders are channeling funds across the Pacific island nation at a rate that is in stark contrast to its squeaky, highly ethical global image.
New Zealand’s last attempt to make a reputation in reality came late last month when Commerce Minister David Clark promised to introduce public registry it will be a list of real (“profitable”) owners of New Zealand companies. Such a move would be a form of catching up – it has existed in the UK since 2016 – and has long been called for by global bodies such as the Financial Action Task Force (FATF).
Much of the international fraud is based on what is known as “shell game”In which revenues and assets are channeled through a number of interconnected companies, partnerships and trusts. The goal is to keep the real owner of the secret a secret so that anti-corruption and tax authorities cannot track their bribery payments or demand that they pay taxes. That is why many global bodies now call it “secret jurisdictions” rather than “tax havens”.
Organizations such as the Tax Justice Network have considered New Zealand to be a player though smallin the secret offshore financing market. Official analysis shows New Zealand earns at least $ 1.35 billion a year from money laundering. It is important, however, that the authorities have no idea how many global fraudsters are sending to or through the country through New Zealand-registered companies.
Such scammers, 2021 FATF report found using the country’s reputation as a “well-regulated jurisdiction” to disguise its activities. Local business reports are replete with stories of foreign investors investing their money in vehicles registered in New Zealand, believing that this guarantees a high degree of control – just to find out otherwise.
Some problems stem from the market reforms of the 1980s in a country in which “easy” regulation was one of the dominant mantras. The country likes to show off its 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 cost of setting them up is kept low in part due to the fact that regulators exercise so little due diligence.
In a statement, Clark said the registry he proposed would “go a long way” to improving the transparency of company ownership.
The registries, however, are not perfect. If New Zealand follows a foreign practice and identifies the beneficial owner as the person with 25% of the company’s shares, five people can have 20% each and do not announce any of their names. And, except when there are large “red flags”, officials do not offer to check whether those who register are the beneficiaries of their companies.
New Zealanders also make extensive use of family trusts. These are arrangements in which an individual (“settler”) theoretically has set aside assets for trustees to manage them on behalf of others, but in practice often still controls the assets. Family trusts were used to evade taxes and hide assets from creditors and ex-spouses.
Four million New Zealand adults have created somewhere between 300,000 and 500,000 such trusts – but no one knows the real number, because they do not need to register. If, under the law proposed by Clark, the trust is the beneficial owner of the company, it will have to disclose the name of the trustees, but not the founder, who business commentators are afraid will leave a big gap in transparency.
However, there are fears that the proposed register will be weakened before it actually gets into the statute, based on New Zealand’s recent anti-corruption efforts. Michael Macaulay, a professor of public administration at the University of Victoria in Wellington, notes that “Each time we received either a diluted version or nothing at all.” He refers to an abandoned attempt create a register of lobbyistsbills that do not properly support whistleblowers, and anti-bribery laws that still allow bribes in certain circumstances.
New Zealand’s complicity in international fraud has also been exposed Panama Papers 2016in which was the illicit world wealth shown hidden through its “foreign trust” regime. This allowed foreigners to place assets in trusts based in New Zealand but were not required to disclose information about their activities. These trusts were got into scandals from the multibillion-dollar Malaysian fraud 1MDB to the infamous Brazilian corruption case “Lavo Jato” (“Car Wash”).
Commentators began to describe New Zealand as a tax haven and even, according to the director of the International Consortium of Investigative Journalists Gerard Rile, “Soft touch”. Embarrassed by this criticism, the government cracked down on the foreign trust regime by demanding much more information from the tax authorities and reducing the number of registered by three quarters.
However, many weaknesses remain. The FATF’s 2021 assessment highlighted vulnerabilities, including the “major” risks posed by the failure to properly regulate nominee directors and shareholders, who often effectively hold – or conceal – assets on behalf of others. Illegal activities were carried out not only through fictitious companies, but also through trusts, the task force found out, calling to register both the latter and the former.
New Zealand would be wise to act on these issues as world public opinion continues to turn against states of secrecy and the illegal activities they allow. However, there is a so-called transparency paradox: greater openness can improve a country’s reputation in the long run, but damage it in the short run, as the scale of the offenses becomes apparent. New Zealand has not wanted to take such a risk in the past; no one should be too sure what it will do in the future.