Transparency Times July 2016

From the Chair

Suzanne Snively

Suzanne Snively
TINZ Chair

New Zealand is increasingly a place rich in diversity – and this results in awareness, empathy and engagement with international politics and global economics. This is very precious.

Since the beginning of the 21st century, the developed world is becoming less like this.

Following the September 2001 terrorist attacks in the United States there have been subsequent terrorist attacks across the globe, just these last few weeks in Turkey, Bangladesh and Iraq.

There’s also been an unprecedented level of international counter-terrorist activity aimed at making terrorist attacks more difficult to carry out. Yet at times the stringency of these measures almost seems like  terrorism itself, with long queues in public spaces, like airports, that are extremely invasive of personal space, dignity, and frustratingly time consuming.

Bigger than terrorism internationally is the breakdown in state control associated with the continuing instability in parts of the Middle East and North Africa. Further, there’s a proliferation of weapons of mass destruction in an increasing number of fragile states around the globe.

Growing inequality seems to be amplifying tensions and leading to conflict, particularly in developing or fragile states where the average age is 25 and the rivalries are between cultures living within common boundaries.

Recent political events including the United Kingdom’s vote to exit the European Union, the Australian cliff-hanger election, and the rise of Donald Trump in the United States; have heightened awareness in New Zealand of how precious it is to have a population that can resolve issues in a constructive manner.

One important way we can change this picture in New Zealand is by bringing together a public sector with a strong integrity system, a humanistic civil society, and an innovative business and corporate sector. The values that support this are transparency, respect, integrity, courage, plus environmental, cultural and social sustainability.

Organisations can do this based on a certain conviction that a core commitment to integrity will yield not just moral fruit, but economic reward.  Key aspects of this are:

  1. Ethics as a topic underpinning an organisation’s strategy, Board agenda and/or management performance oversight
  2. Codes of Conduct integrated with management's direct staff communication 
  3. Increasing openness, where staff speak up
  4. The ethics function identified across organisations relevant to scale and structure.

Not only do we need to prevent corruption, we need to harvest the benefits of integrity.  It’s the benefits that will provide the returns to invest in marketing and innovation that generates new jobs, providing a return to invest in environmentally-sustainable processes.  All this leads to a stronger tax base for the provision of education and housing improvements.

It will be through New Zealand demonstrating these results that the rest of the world can visualise a future more positive than waking up each day to yet more stories of terrorism and young populations at war with their own citizens.

Suzanne Snively, Chair
Transparency International New Zealand Inc.

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.

Janine McGruddy becomes TINZ CEO

New TINZ CEO Janine McGruddy signing her contract with TINZ Chair Suzanne Snively

Former board member Janine McGruddy has been contracted from 1 July as TINZ’s Chief Executive Officer. She is charged to further TINZ’s mission of raising awareness and debate amongst New Zealanders in respect to opportunities and challenges of corruption and integrity.

An important area of focus for TINZ is to build a viable, professional and sustainable Chapter. The CEO will report to the TINZ Chair and will be accountable for implementation of the strategy approved by the TINZ Board, including acquiring resources for TINZ to be effective at raising awareness.

The early work of the Chief Executive Officer will focus on building a resource base which includes partnership, membership and donor funding.

Let the sun shine on the Saudi sheep deal

by Brendon Wilson

TINZ Board Member

Information flows about the Saudi importation of New Zealand sheep are developing momentum now that a number of credible commentators are uncovering further details.

On 2 July, The Nation TV3’s Phil Vine brought new information to the New Zealand public, including

  • A key Saudi businessman who said that legal action against the New Zealand Government was not contemplated by the Saudi partners. This contrasts with Minister McCully’s statement to Parliament that there could be a Claim of between $20 million and $30 million.
  • Confirmation by Saudi partners that New Zealand’s first (seriously unsuccessful) shipment of 900 live sheep, was intended to be just a trial for far larger continued shipments of 45,000 sheep!

The Nation described the nature of the transactions.

  • Saudi billionaire Sheik Hamood Al Khalaf had invested in New Zealand to send live sheep to Saudi Arabia but was extremely disappointed that the intention was stymied by both governments.
  • Despite New Zealand’s long-term banning of live sheep exports for slaughter, it seems clear that Minister McCully thought that finding an innovative way of evading this rule for Sheik Hamood Al Khalaf and his partners would help New Zealand gain Saudi government support for a free trade deal. The innovation included spending $6million on an ‘Agrihub’ in Saudi Arabia to promote New Zealand's agricultural prowess, and transporting 900 of the Sheik’s own sheep from New Zealand to Saudi Arabia in 2014 by plane at a cost of $1.5 million.
  • Additionally, Minister McCully claimed the Sheik was about to take a legal case against New Zealand for $20-30million over his lost earnings. MFAT paid him $4million to prevent legal action.
  • Minister McCully and Prime Minister Key have continually denied that anything underhand or outside New Zealanders’ expectations or legal requirement has occurred, or that parliament (and cabinet) have been misled in any answers to concerns: “move along now, nothing going on here”. The Auditor General’s investigation is on-going.

In light of these recent revelations, supported by interviews and documents, it is even more critical that the Auditor-General’s investigation into these transactions is completed as soon as possible so that the sun may shine and bring openness to a subject which could tarnish New Zealand’s international trade reputation.

Are we immune to political corruption?

Josephine Serrallach

Josephine Serrallach TINZ Director

by Josephine Serrallach

TINZ Director

Sometimes seeing events unfold on the other side of the world can bring clarity and objectivity to our own view of the basics of New Zealand democracy. We can look at our own landscape through a clear lens and recognise the need to be vigilant against a tsunami of worldwide corruption and feel the urgency to protect a culture based on integrity.

In Spain, General Elections were held on the 26th of June. The majority of votes were won by the political party suffering major corruption scandals. In spite of continuous uncovering of corruption within this party, Spanish citizens voted in favour of more of the same – in favour of even more corruption.

Four days before the election, the Spanish Minister of the Interior, Jorge Fernandez Diaz, faced calls to resign over a leaked recording of his conversation with the Head of the Anti-Fraud Office of Catalonia. During the meeting they had discussed ways to incriminate leaders of pro-independence politicians in the region of Catalonia.

In spite of the resulting strong calls from the public for the resignation of both the Minister and the Head of the Anti-Fraud Office, neither resigned. Instead they publicly condemned the leak.

Spanish Minister for Home Affairs, Jorge Fernández Díaz

Spanish Minister of the Interior, Jorge Fernández Díaz

Defiant Daniel de Alfonso Head of the Anti Fraud Office in Catalonia

Defiant Daniel de Alfonso Head of the Anti Fraud Office in Catalonia

The Head of the Anti-Fraud Office was dismissed a few days later by the Catalan Parliament on the basis that the Anti-Fraud Office should be a model of integrity, politically independent and non-partisan. But at the same time the acting Spanish Prime Minister, Mariano Rajoy, defended the actions of his Minister. In this way he actually condoned the use of the state apparatus to fight against political rivals.

In many other democratic countries, this scandal would have ended with the resignation of the Minister concerned and of the Prime Minister for supporting such clear political corruption.

New Zealand citizens rely on the integrity of its institutions in the public sector, and on the integrity of its officials. It would be inconceivable that the head of the Serious Fraud Office could be involved in such political corruption to benefit the party in power.

Yet, we are not immune. Prior to the last New Zealand election the inappropriate collaboration between Ministers and bloggers was uncovered, but did not affect the outcome of the election. Do the citizens of our country accept this type of action as a normal political practice?

The example described in Spain is only one of many such lapses in political integrity around the world. Recognising this as political corruption serves to emphasise the need to protect our precious culture of integrity in our own public institutions, private organisations and all of New Zealand society.

Proactive disclosure in New Zealand

Áine Kelly Costello

Áine Kelly-Costello with her Flute

Áine is a University of Auckland student in her final year of a conjoint degree majoring in English, Spanish and Classical Flute Performance. She enjoys jam sessions and quality catch-ups.

She campaigns actively to urge the University to divest its money from the fossil fuel industry. She is a member of Blind Citizens New Zealand. Last semester Áine was an intern with TINZ.

by Áine Kelly-Costello

In New Zealand we want to establish the most useful mechanisms to ensure agencies proactively publish as much information as is feasible. This is to satisfy public demand for transparency and increase public trust of authority.

There appears to be a broad consensus on this logic from various interested parties, such as:

  • Transparency International New Zealand;
  • New Zealand Law Commission 2012 Review [1];
  • Report by former Chief Ombudsman Dame Beverley Wakem [2]; and
  • Correspondence from current Chief Ombudsman Judge Peter Boshier.

When considering how to increase proactive disclosure in our country, it is sensible to consider which steps have already been taken by other countries and what we can learn from them.

I have researched Spain's Transparency Act; reviewed the Act's broad scope and the key areas covered within it. My report, Proactive Disclosure in New Zealand – What New Zealand can learn from the introduction of proactive disclosure in Spain, analyses what New Zealand can learn from Spain, and establishes key recommendations concerning the introduction of legislation and other forms of regulation in New Zealand.

Three key recommendations for introducing proactive disclosure legislation in New Zealand emerge as a direct result of examining the Spanish Act.

  1. Compliance with proactive disclosure legislation must be enforceable and realistic.
  2. The legislation must have at its core both the interests of the public and the interests of all affected entities.
  3. Proactively disclosed information must be easy to locate and user-friendly for everyone.

New Zealand has a long way to go before we might realistically see well-thought-through legislation being passed in Parliament. In the shorter term, the following steps reflect more manageable aims:

  • Officially clarify the roles of the Ombudsman, the State Services Commission and the Ministry of Justice with regards to monitoring of the OIA, proactive disclosure of information and the implementation of the Open Government Partnership National Action Plan.
  • Prepare guidelines which outline best practice for proactive disclosure of information. These should include a clear statement of rationale for disclosure efforts, and a non-exhaustive listing of the types of information. It is highly recommended for agencies to disclose at a minimum, and reference to the need for balancing the public interest against the feasibility of proactively publishing the information. Upon release of such guides, all affected agencies should be made aware of their existence, and in particular, the benefits of following them.
  • Consider giving the public optimal access to information as a crucial pillar of transparency and accountability, and work to integrate clearer demands and guidelines for these into the forthcoming Open Government Partnership National Action Plan
  • Consider the potential utility of lobbying MPs to put transparency, particularly with regards to access to information, at the forefront of the nexy election campaign.

External references:

1. Law Commission, 'Review of Official Information Act Legislation' (2012) at 252. See:  http://www.lawcom.govt.nz/sites/default/files/projectAvailableFormats/NZLC%20R125.pdf

2. Office of the Ombudsman, 'Not a Game of Hide and Seek', Report of Chief Ombudsman Dame Beverley Wakem DNZM, CBE (December 2015), at 7 and 84. See:  http://www.ombudsman.parliament.nz/ckeditor_assets/attachments/401/oia_report_not_a_game_of_hide_and_seek.pdf?1449533878

3. Proactive Disclosure in New Zealand – What New Zealand can learn from the introduction of proactive disclosure in Spainin pdf format, in docx format.

White hats or black hats

As long as they catch vice?

by Ferdinand Balfoort

Transparency Times regular contributor

White Hat vs Black Hat

Spot the difference and the potential outcome. Courtesy of www.labnium.org.

In an earlier less regulated era, the current Chinese Leader Deng Xiao Peng, noted that “It doesn't matter whether a cat is white or black, as long as it catches mice.”

Equally, in IT terms white and black hat hackers are both focused on finding vulnerabilities in IT security systems, the former for the purposes of identifying and remediating them, while the latter focuses on exploiting them.

Does this choice of colour apply to financial services, professional accountants and lawyers? I would posit it does. Legal and regulatory systems are intended to provide protection against what society deems to be infractions that affect the greater good negatively, including tax evasion and money laundering. As a principle, laws and regulations are man made and therefore contain loopholes. Any white hatted professional could easily decide to become a black hat in the space of the time it takes to determine how to exploit a loophole. Our recent history is replete with examples.

In my work, I am engaged in several situations where not knowing the colour of the hat is costly.

Case 1: We are currently guiding a venture towards successful production and commercialization. It takes waste rubber tyres and plastic bottles and turns them into a new industrial product that can be used in a wide range of industries, (at half the cost of existing raw materials).

Having finally identified some investors in Europe to fund the development of the production plant, the biggest hurdle we now face is the bank imposed ‘Know Your Customer’ procedures. Client start-up funding has been transferred backwards and forwards between two major banks in Europe over the past three weeks in a game of financial ping pong. The UK bank does not believe the relevant due diligence forms have been prepared properly by the continental bank, and as a result, the much needed funds are in limbo.

We expect more grief when the mainstream bank in the UK transfers the funds to a smaller local bank, which will also want to do due diligence again. It is great for the compliance professionals involved. It is obviously not positive news for the principals of the start-up, whose nails have been bitten to the quick during this period. The smaller bank is now essentially the final arbiter whether this promising environmental venture lives or dies.

barbeque near a tire dump out of hand

A barbeque near a tire dump, Sesena, Spain, recently got out of hand. Courtesy of WSJ

Case 2: In Mauritius, we have been assisting a client to make sense of recent Foreign Account Tax Compliance Act (FATCA) imposed rules, that have filtered through to a local management company which registered and maintains an African holding company for my clients. The client is a company providing critical services on the African continent.

We wear white hats and do not work with any clients for which we have not completed our own satisfactory risk assessment and due diligence. New FATCA driven rules require an additional non-executive director from the management company, in addition to their bank authorizers and approvers. The client has had to accept this interference of their business, as well as a threshold on transactions of US$ 25,000 above which management company personnel must approve any transfers. Each and every transaction through bank accounts is vetted and reviewed at an average cost of US$ 50.

My clients spend a substantial part of their day, diverted from their core business practice while meeting the regulatory due diligence requirements and answering queries from the Mauritius management company. The management company is essentially starting to run my client’s business and charging for this dubious pleasure.

Case 3: Meanwhile in Malaysia, a major Wall Street investment bank is under investigation for not alerting authorities about an unusual transaction in the order of US$ 3 billion. The impact of the investigation is yet to be confirmed. It may lead to fines. This has usually been the case in the past decade when major banks were negligent.

The world is increasingly run via regulations that are adding much red tape and burden to companies.

This article outlines three different cases, but all very much connected to black hats and white hats. The white hat role of banks, accountants and other professionals involved in the setting up and management of corporate entities for their clients decreases the risk of corruption and fraud, while disproportionately suffering unproductive regulatory interference. A choice to wear a black hat perversely makes the world a more tricky place, as the exploitation of loopholes will ultimately result in more patchwork regulation to cover the gaps.

In this context, Transparency International New Zealand has consistently called for accountants and lawyers to put on their white hats, and to be pulled into the ambit of anti-money laundering legislation and requirements. We have also called for a public register to show beneficial owner details for those involved in all the facets of establishing and managing corporate entities globally.

The EU commission aims to crackdown further on money placed offshore for tax reasons. Courtesy the Guardian

This is echoed in the latest debate on EU regulations to introduce measures to identify the real ownership of companies and to clamp down on offshore avoidance, which are in the pipeline. Unfortunately, the pipeline is leaky again, as Laure Brillaud from TI EU notes: “This is a bold step by the commission but it’s not the brave leap needed to end this system of secrecy which fuels impunity”. Aided by black hat professionals, may we add.

It is this lack of transparency and coverage which causes the detailed invasiveness my clients suffer, while large transactions somehow slip under the radar. There are simply too many black hats out there, carrying time bombs behind their backs.

As a result, the costs of regulatory oversight and invasiveness are disproportionally borne by smaller businesses. A large investment bank may pay a fine which will, likely, be an immaterial tax on its professional fees. My clients also pay a “tax”, but in their cases this is a much higher burden proportionally. And it perversely increases the professional fee income for professional services firms. As long as we don’t have transparency in registration of legal entities (and our professionals are not held to account to perform appropriate risk assessments), every genuine entrepreneur globally will suffer because of the misdemeanours of others.

Isn’t it time to wear your white hat? Or will we continue to act as if “it don’t matter if you’re black or white”?

The temptation of corruption in sport

by James Brown

TINZ Director

Specialising on preventing sports corruption

Corruption in sport can be broken into two areas: namely competition and management corruption. Competition corruption includes doping, performance enhancing drugs and match manipulation. Management corruption involves accepting personal payments and expensive perks in return for awarding venues and preferential sponsorships.

FIFA, football's world governing body, has been engulfed by claims of widespread management corruption that has claimed the careers of two of the most powerful men in football,FIFA President Sepp Blatter and UEFA President Michel Platini, both of whom have been banned for eight years from all football-related activities.

In May last year, the US indicted 14 current and former FIFA officials and associates on charges of “rampant, systemic, and deep-rooted” corruption following a major inquiry by the Federal Bureau of Investigation.

And in December, 16 more officials were charged following the arrest of two Fifa Vice-Presidents at the same hotel in Zurich. Former Brazil Football Federation Chief Ricardo Teixeira was among those accused of being involved in criminal schemes involving well over $200million in bribes and kickbacks.

Competition corruption is of growing concern as more cases emerge. Athletes facing short competitive lifespans, where the narrowest margin separates average from excellent, are drawn to anything that gives them the slightest competitive advantage. For many, the fear of getting caught is the only deterrent; while some feel that risk is justified.

Match manipulation behind sports gambling is as old as sport itself. It is now a trillion dollar industry. The temptation is strong for athletes and officials to accept compensation for a few missed plays or calls.

Even Rugby – “the gentlemen's sport” – is at risk.

“We don’t suggest rugby is at high risk of match-fixing but there is a risk there nonetheless because the market is growing as is the international interest in gambling and it would be naive to think it would never come knocking on the door,” insists Darren Small. He is Director of Integrity at Sportradar, who works closely with the Rugby Football Union and the Rugby Players Association.

While the foundation of sport is fairness, today huge amounts of money are involved which prove enticing to athletes, officials, and leaders of the governing bodies at all levels to ignore fairness in favour of competitive or financial advantage.

We see this regularly in sports news. It seems from the media that the public is more interested to hear about the next scandal rather than looking forward to a closely fought sporting competition.

Having spent 15 years playing professional sports I would be embarrassed if I found out that my fellow competitors were breaking the rules. Many would assume I was doing the same thing!

It is critical that we devote resources to discourage cheating in sport and dole out severe punishments when it is uncovered to eliminate the temptation and ensure fairness.

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