Alongside endangered birds, abnormally large sheep and – in the popular imagination – hairy-toed hobbits, New Zealand is a haven for another curious specimen: the illicit flow of offshore finance. The world’s fraudsters and tax dodgers channel funds through the Pacific island nation at a rate quite at odds with its squeaky-clean, highly ethical global image.
New Zealand’s latest attempt to make reality match reputation came late last month, as the commerce minister, David Clark, pledged to introduce a publicly accessible register that would list the true (“beneficial”) owners of New Zealand-based companies. Such a move would represent a form of catch-up – Britain has had one since 2016 – and has long been urged by global bodies such as the Financial Action Task Force (FATF).
Much international fraud relies on something known as “the shell game”, in which income and assets are funnelled through a series of interlinked “shell” companies, partnerships and trusts. The aim is to keep the true owner of the wealth secret, so that anti-corruption bodies and tax authorities cannot track down their bribery payments or require them to pay tax. Hence why many global bodies now refer to “secrecy jurisdictions” rather than “tax havens”.
Organisations like the Tax Justice Network have found New Zealand to be a player, albeit a small one, in the market for secretive offshore finance. Official analysis shows at least $1.35bn of income for money-laundering is generated inside New Zealand each year. Crucially, though, authorities have no idea how much is channelled into or through the country by global fraudsters using New Zealand-registered companies.
Such fraudsters are, a 2021 FATF report found, using the country’s reputation as “a well-regulated jurisdiction” to disguise their activities. Local business reporting is replete with stories of overseas investors who have put their money into vehicles registered in New Zealand, believing this guarantees a high degree of scrutiny – only to find otherwise.
Some of the problems stem from the country’s 1980s pro-market reforms, in which “light-touch” regulation was one of the dominant mantras. The country likes to boast of its number one ranking in the World Bank’s “ease of doing business” survey. The flipside, the FATF argues, is that its companies are unusually “vulnerable to abuse” because the cost of setting one up is kept low partly by regulators doing so little due diligence.
In a statement, Clark said his proposed register “will go a long way” towards improving transparency of company ownership.
The registers are not flawless, however. If New Zealand follows overseas practice and defines a true owner as someone with a 25% stake in a company, five people could hold 20% each and declare none of their names. And except where there are major “red flags”, officials do not propose to check whether those registering are indeed the beneficial owners of their firms.
New Zealanders also make sweeping use of family trusts. These are arrangements in which an individual (the “settlor”) has in theory put aside assets for trustees to run on behalf of others – but in practice often still controls the assets. Family trusts have been used to avoid tax and hide assets from creditors and former spouses.
New Zealand’s four million adults have set up somewhere between 300,000 and 500,000 such trusts – but no one knows the true figure, because they do not have to be registered. If, under Clark’s proposed law, a trust is the true owner of a company, it will have to disclose the name of the trustees – but not the settlor, which business commentators fear will leave a major gap in transparency.
There are concerns however that the proposed register will be weakened before it actually reaches the statute books, based on New Zealand’s recent efforts to tackle corruption. Michael Macaulay, a professor of public administration at Victoria University of Wellington, points out that, “Every single time, we have ended up with either a watered-down version or nothing at all.” He cites an abandoned attempt to create a register of lobbyists, draft legislation that fails to properly support whistleblowers, and anti-bribery laws that still permit bribes in certain circumstances.
New Zealand’s complicity in international fraud was also exposed by the 2016 Panama Papers, in which illicit global wealth was shown to be hidden through its “foreign trust” regime. This allowed foreigners to place assets in trusts that were based in New Zealand but did not have to disclose information about their activities. These trusts were caught up in scandals ranging from the multi-billion-dollar Malaysian 1MDB fraud to the notorious Brazilian “Lavo Jato” (“Carwash”) corruption case.
Commentators began describing New Zealand as a tax haven and even, in the words of International Consortium of Investigative Journalists director Gerard Ryle, “a soft touch”. Discomfited by this criticism, the government cracked down on the foreign-trust regime, requiring far more information to be shared with tax authorities and cutting the number of those registered by three-quarters.
Multiple weaknesses remain, however. The 2021 FATF assessment highlighted vulnerabilities including “major” risks caused by the failure to properly regulate nominee directors and shareholders, who often effectively hold – or hide – assets on behalf of others. Illicit activity was being carried out through not just shell companies but also trusts, the taskforce found, urging that the latter be registered as well as the former.
New Zealand would be wise to act on these issues, as global public opinion continues to turn against secrecy states and the illicit activities they enable. The so-called transparency paradox applies, however: greater openness can improve a country’s reputation long-term but damage it short-term, as the extent of wrongdoing becomes apparent. New Zealand has not been willing to run this risk in the past; no one should be overly confident it will do so in future.