The Financial Action Task Force (FATF) is currently reviewing Recommendation 25: Transparency and beneficial ownership of legal arrangements. In New Zealand some form of trust is the most common form of this legal arrangement.
The FATF set of recommendations are the internationally endorsed global standards against money laundering and terrorist financing: They increase transparency and enable countries to successfully take action against illicit use of their financial system. So it is not surprising that Transparency International globally is active in advocating for improvements to this Recommendation.
What is the relevance of this to New Zealand?
We have talked in other articles about the opaque nature of New Zealand trusts, and the inappropriate use of some trusts - hidden in the general mass of regular family trusts - to hide assets, to avoid overseas tax and to hide ill-gotten funds.
How many trusts operate in New Zealand?
TINZ recently sought information from Inland Revenue (IR) about trusts in New Zealand (our OIA response from IR is available here). This shows a whopping 327,680 active non-charitable trusts and 14,520 tax-exempt charitable trusts. There are a further 99,420 non-active trusts. We suspect there are probably more trusts hiding in filing cabinets and drawers around the country.
The table provides a breakdown of the trust registrations at entity level held by Inland Revenue by the sub-classification of trusts in its registration data.
The table tells us that there are over 400,000 “legal entities” in New Zealand that are subject only to registration with IR, which is covered by tax secrecy. Whilst we would expect that IR shares some information with overseas tax authorities, there is limited evidence that it shares intelligence with other New Zealand agencies.
Nearly a quarter of trusts are inactive. That presents a risk, as they can leap into action for a single transaction and then disappear before anyone notices.
We also asked about the number of trustees of New Zealand foreign trusts who are New Zealand tax residents (resident foreign trustees). IR’s answer is that there are currently 2,473 New Zealand foreign trusts (trusts with an active foreign trust rate (FTR) account registration in IR’s systems). It also advised that of the 2,473 New Zealand foreign trusts, 83 have indicated that all trustees are natural persons not in the business of providing trustee services.
This means the vast majority are professionally established by trust companies that market our country as a destination for wealth, often because New Zealand is virtually unique in having no capital gains tax. Theoretically trust & company service providers are subject to enhanced AML controls. We will seek further information to see if IR requests this information from the trust companies.
We asked via our OIA for some breakdown of trusts: eg family trusts, parallel trusts, single and business trusts. Inland Revenue advised that it does not hold this information and they believe it is unlikely that any other agency holds it.
What does all of this mean in layperson terms?
- There are a large number of “trust” arrangements operating in New Zealand with very little clarity about what they are established for.
- There is very little information held by agencies on the settlor trustee and beneficiaries of trusts and no distinguishing between types of trusts, such as family, parallel, single and business trusts in New Zealand.
- There is very limited information held on foreign owned trusts and trustees
In our view New Zealand does not meet the current standard set by FATF Recommendation 25 which includes measures to make beneficial ownership and control of trusts available to authorities. There are requirements on trusts to hold information, but that does not sit in a central register. It is not clear if any agency is doing any checking on AML compliance and/or reporting by overseas-based trust companies.
We have been calling for a voluntary low-touch public registration mechanism for trusts that would make things easier and cheaper for simple family trusts and charitable entities, exempting them from mandatory Enhanced Due Diligence for AML purposes. That would cull out the majority of those in the table above, revealing those hiding amongst the foliage.