Shewan Inquiry on foreign trusts

The Government Inquiry into Foreign Trust Disclosure Rules conducted by John Shewan (the Inquiry) was released last week. Transparency International New Zealand (TINZ) is pleased with the widened scope and clear set of recommendations about what the Government needs to do to tighten up foreign trusts. The Inquiry contains considerable contextual information that should be read by officials, businesses and civil society organisations (see http://www.treasury.govt.nz/publications/reviews-consultation/foreign-trust-disclosure-rules)

The Panama Papers highlighted a range of fundamental transparency and risk areas, many of which New Zealand public officials were already well aware of. This enabled the Inquiry to comprehensively address its scope in the short time available.

The Inquiry acknowledged officials from the Treasury who ran the secretariat and coordinated questions and responses to the IRD and inputs from officials from the Ministry of Justice, the Department of Internal Affairs, the Financial Intelligence Unit of the New Zealand Police, the IRD, the Department of Prime Minister and Cabinet and the Privacy Commissioner.

Although the terms of reference could have constrained the Inquiry to merely investigate foreign trusts, in fact the Inquiry also tackled the broader spectrum of financial crime risks associated with New Zealand trusts.

TINZ observed in its recommendation to the Shewan Inquiry that the transparency of all corporate vehicles, including foreign trusts, is essential to prevent and detect serious international crime involving billions of dollars by constraining activities such as money laundering, ill-gotten asset transfers and other forms of international corruption. The Inquiry recommended that the Government “address issues with the existing disclosure rules, which are not considered fit for purpose”.

Regrettably, the Inquiry focused solely on trust structures, overlooking a comprehensive view of vehicles used to hide illicit activities. For example, the Inquiry notes that Look Through Companies (LTCs) is an issue but only acknowledges tax laws. It fails to consider the issue of ultimate beneficial ownership for corporate entities and issues of corruption beyond tax fraud. This is in contrast to the UK response (highlighted in the Inquiry on page 11) which calls on countries to ensure transparency of beneficial ownership of “companies, trusts, foundations, shell companies and any other relevant entities and arrangements”.

The Shewan Inquiry recommendations cover many of the remedies TINZ has been advocating while ignoring others. Turning to the TINZ recommendations to the Inquiry:

  • Extend the New Zealand AML/CFT Act (2009) to cover all professionals, including lawyers and accountants, who are engaged in setting up and managing New Zealand corporate vehicles.
    Mostly addressed by the Shewan Inquiry with the recommendation that consideration also be given to the removal of the Order in Council earlier, prior to December 2016
  • A corporate registry is established that includes beneficial ownership of relevant business structures to enable review and audit by law enforcement and compliance bodies and is consistent with international efforts.
    Not addressed
  • The entity operating the corporate registry is adequately resourced and funded to be effective.
    Not addressed
  • There is transparency of trusts to understand the ultimate beneficial owners through the establishment of a similar registry for trusts.
    Addressed – the Inquiry recommended that there be a “Significant increase in information required to be disclosed (details of settlor, persons with effective control, non-residential trustees, beneficiaries, trustees, trust deed) coupled with annual return, expanded application of the AML laws and a register of foreign trusts, searchable (but not by the public)".

The Shewan Inquiry agreed with TINZ’s statement that it is important that New Zealand is actively involved in international efforts to combat misuse of trusts and companies in cooperation with countries and NGOs globally. Furthermore, our reputation for integrity requires an active New Zealand role in discussing and implementing workable remedies.

As the Inquiry describes in its High-level overview, under the existing disclosure regime, there is potential reputational damage.

“New Zealand’s reputation as a country that cooperates with other countries’ to counter money laundering, abusive tax practices and other illicit activities may be tarnished.

Perception internationally that New Zealand has weak laws around due diligence and reporting and is generally a soft touch.

New Zealand being cited as a tax haven…”

These potential reputational risks can be mitigated by legislation being introduced as soon as possible to tighten up the disclosure regime for foreign trust (and company) entities. The detailed discussion of existing processes in the Shewan Inquiry provides a clear path for the way forward. Now it’s up to Parliament to do its job.

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