Closing loopholes in trusts

Adam Hunt
Transparency International New Zealand

International agreements make some people yawn and others yell, but in our field they are part and parcel of preventing corruption.

Right now the Financial Action Task Force (FATF)  is reviewing one of its 40 recommendations, recommendation (25). This recommendation is around the transparency and beneficial ownership of legal arrangements such as trusts. FATF is an intergovernmental body and anti-money laundering watchdog, whose recommendations strongly influence governments’ policies. New Zealand is co-chairing the current review.

Anti-corruption movements such as Transparency International are advocating improvements to recommendation (25) intended to make it more difficult to use trusts to launder money and hide ill gotten funds and assets.

Countries including New Zealand are committed to adhering to  FATF recommendations. and periodically peer assess each other’s performance against the recommendations. Countries usually respond positively to peer assessments.  So updating these recommendations is a chance to strengthen global corruption preventive measures.

Recommendation 25, what’s that all about?

Recommendation 25 is about trusts and similar legal arrangements. 

A trust is a structure in which a person (the settlor) transfers assets to another person (the trustee) who manages the entrusted assets following the settlor’s instructions, for the benefit of the beneficiaries (either persons named by the settlor to receive income or the entrusted assets at some point, or a defined class of unnamed persons). In some trusts, there may be a “protector” (generally named by the settlor) who oversees the trustee’s actions.

Ok, I can virtually hear the yawns and see eyes crossing.

Let’s try a family trust example.

Aunty Sheila decides that a piece of property she owns should be provided for the benefit of her broader family. She transfers that property into a trust which is managed by a niece Karen. Sheila is the settlor, Karen is the Trustee. Karen manages the trust on behalf of a set of beneficiaries who include Karen’s siblings and potentially, their children. Karen’s siblings and their children are the Beneficiaries.

“Leave the family trust alone” – we hear that often, even the Law Commission has been befuddled by this mass of family trust arrangements. Ok let’s put family trusts to one side. It is quite feasible to design a system that doesn’t put the spotlight on them. Corrupt trust arrangements hide within that mass of other trusts.

What is a corrupt trust?

Here is an example:

Baden Crook and his friend Wila Dila live in World Citizen City. They have a few truckloads of cash received from nefarious deeds that they would rather not have visible. They engage Hideout Professionals, a New Zealand based Trustee service provider to set up and manage a trust. Hideout registers the trust in Samoa, and manages it in New Zealand. The trust purchases land and assets here and there, which are then on-sold to other entities.

Who are the beneficiaries? Who is in control? There are no registration systems for trusts in New Zealand or Samoa, so no one is checking. Meanwhile money from crime shifts into the legal financial system without visibility, partly enabled by the New Zealand financial infrastructure. It happens every day in New Zealand, in Samoa, in Australia and around the world. It is wrong and it needs to stop.

It is well documented that legal instruments have been used frequently to hide money from transnational crime and to avoid tax or line of sight from another jurisdiction. That is what this current review of Recommendation 25 is about. TI globally is advocating for more clarity, better definitions, fewer loopholes.

Can we make a difference?

Yes we can make a difference. One great example is the recent change to disclosure rules for foreign trusts operating in New Zealand. Prior to 2016 New Zealand was a virtual haven for foreign crooks. The government was forced to implement tighter disclosure rules following the release of the Panama Papers. Due to this legislative change we saw a dramatic reduction in the number of foreign trusts operating in New Zealand. 

But we still have an estimated 300,000-500,000 domestic trusts, many of which are suspected of being involved in shady dealings. We can’t look closely at them because there is no available register.

We have been told in our recent FATF peer review that our country should consider developing a register for domestic trusts. It is frustrating that the government is not including trusts in the impending plans for a beneficial ownership of companies and limited partnerships. 

Transparency International New Zealand is directly advocating for changes to the New Zealand trust regime and recommendation 25. Meanwhile the global Transparency International movement is exerting international pressure including a submission co-signed by TINZ and many members of the movement. We need pressure from without as well as from within.

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