Financial Action Task Force's anti-money laundering review of NZ highlights the openness to abuse of trusts and company nominee director & shareholder arrangements

The openness of New Zealand companies, trusts, limited partnerships and nominee director and shareholder arrangements to abuse for nefarious purposes is being highlighted by the Financial Action Task Force (FATF).

The Paris-based FATF, an inter-governmental body that sets international standards, is considered the global money laundering and terrorist financing watchdog. Its latest country assessment, or mutual evaluation, of NZ was released Thursday evening NZ time.

FATF notes trusts are very common in NZ with up to 500,000 in existence, which are used for a range of purposes including as holding vehicles for assets such as the family home. FATF points out NZ doesn't have a register of all domestic trusts and suggests the Government considers introducing one.

Meanwhile, FATF says NZ does well on the confiscation of proceeds of crime, I.E.. seizing piles of cash and Ferraris from gangs, but doesn’t do so well when it comes to white collar crime.

"Major gaps in NZ’s framework" include insufficient measures to mitigate the risks posed by nominee directors and shareholders, insufficient mechanisms for authorities to obtain adequate, accurate and current company, limited partnership and trust beneficial ownership information, and insufficient measures for adequate, accurate and current information on trusts, FATF says.

Even though local companies are required to have at least one NZ or Australian resident director, FATF says given authorities’ lack of visibility about whether a director is acting as a nominee director (and for whom they are acting), the effectiveness of the resident director requirement would be strengthened by efforts to ensure effective implementation of targeted financial sanctions by trust and company service providers, lawyers, accountants, and any banks with which an account is held.

"New Zealand’s legal system provides for a wide range of legal persons and arrangements, and authorities have a comprehensive understanding of the money laundering and terrorist financing risks associated with them. In recent years, New Zealand has implemented measures to mitigate the money laundering and terrorist financing risks of misuse of legal persons and arrangements, including the creation of a register of New Zealand foreign trusts, and residency requirements for company directors. However substantial gaps remain in relation to ensuring the availability of adequate, accurate and current beneficial ownership information, and in relation to nominee directors and shareholders.

"New Zealand companies and limited partnerships are vulnerable to abuse for money laundering and terrorist financing purposes due to the low cost with which they can be established, as well as New Zealand’s reputation as a well-regulated jurisdiction. Nominees are able to provide resident director or trustee services for oversees customers. Law enforcement have noted the abuse of New Zealand shell companies for both transnational and domestic laundering. Domestically, trusts are widely used in New Zealand and there are comparatively fewer measures to enable law enforcement to detect the abuse of trusts for money laundering and terrorist financing purposes," FATF says.

'We're number one'

The World Bank's Doing Business Report ranked NZ number one for "ease of starting a business" last year for the twelfth consecutive year. Whilst the Ministry of Business, Innovation and Employment (MBIE) likes to trumpet this and it's great for genuine Kiwi businesses, it's also well known to people all over the world with nefarious intent. Interest.co.nz has documented this over the past decade since then-Commerce Minister Simon Power revealed in 2011 that 143 NZ registered companies had been implicated in criminal activities overseas such as smuggling, money laundering and tax fraud over four years with NZ Police and the Customs Service receiving 134 enquiries about them.

Among the priority actions FATF recommends is improving the availability of accurate and up-to-date beneficial ownership information on legal persons, particularly limited liability companies and partnerships, and domestic trusts, and taking steps to mitigate the money laundering and terrorist financing risks of nominee shareholders and directors.

Just this month interest.co.nz highlighted the use of nominee shareholders and directors in the case of NZ company Vivier, behind which convicted British fraudster Ian Andrews is alleged to be pulling the strings.

Information about the beneficial ownership of NZ companies is not currently collected by MBIE's Companies Office, although Companies Registrar Sanjai Raj can request it for law enforcement purposes. MBIE issued a consultation paper in 2018 proposing to increase the transparency of the beneficial ownership of NZ companies and limited partnerships, albeit it proposed to exclude trusts of which there are estimated to be as many as 500,000 in NZ. There are also 25,709 charitable trusts registered with the Charities Services, and 26,117 incorporated charitable trusts.

"Since most trusts are not required to register, it is not known how many trusts there are in New Zealand. New Zealand estimates there are between 300,000 to 500,000," says FATF.

Early last year the then-Commerce and Consumer Affairs Minister Kris Faafoi said cabinet decisions were expected in the second quarter of 2020 on improving beneficial ownership transparency. Against the backdrop of COVID-19, they didn't materialise. In March this year a spokesman for David Clark, Faafoi's successor, told interest.co.nz the project was delayed pre-lockdown 2020 while funding issues were being worked through. Final decisions remain some way off.

“MBIE is working on detailed policy and funding proposals for a unique identifier for directors, general partners and beneficial owners and beneficial ownership transparency. I expect Cabinet decisions to be made sometime next year," Clark's spokesman said.

FATF says that in the absence of a policy decision, corresponding actions have yet to be included in NZ's anti-money laundering and countering the financing of terrorism national strategy action plan.

On trusts, FATF notes NZ doesn't have a register of all domestic trusts.

"Domestically, trusts are widely used in New Zealand and there are comparatively fewer measures to enable law enforcement to detect the abuse of trusts for money laundering and terrorist financing purposes. New Zealand also does not tax trusts with overseas settlors, which has created a market for New Zealand foreign trusts to be used as asset protection vehicles," FATF says.

Foreign trusts are trusts established by a non-resident settlor but which have a trustee resident in NZ. Although they are considered particularly vulnerable to money laundering, terrorist financing and tax evasion, bad publicity stemming from the Panama Papers saw the Government introduce new requirements in 2016 for foreign trusts to register with Inland Revenue and provide key information. FATF points out that as of March 2020, there were 2,807 NZ foreign trusts registered, representing a 75% decline over the previous three years.

"In relation to domestic legal arrangements, New Zealand has introduced policy measures, including law enforcement agencies access to tax information, mandating enhanced due diligence for trusts and reforms of the Trust Act. However, New Zealand is yet to conduct a policy process focused specifically on addressing gaps in access to beneficial ownership of trusts information."

"New Zealand has also identified the money or value transfer service sector as a major risk, particularly alternative remittance providers. While the Department of Internal Affairs and New Zealand Police have taken enforcement action against money or value transfer service providers for breaching their compliance obligations, there is insufficient activity by the relevant administrative authorities to identify unregistered money or value transfer service providers in New Zealand and a lack of clarity as to which agency(ies) are responsible. Authorities should enhance their national strategy to take a joined-up approach to these important risks," says FATF.

'Consider developing a complete trust and company service provider register'

Among things FATF recommends are: introducing measures to improve the availability of accurate and up-to-date beneficial ownership information on legal persons, particularly limited liability companies and partnerships, including consideration of a beneficial ownership register. Additionally FATF suggests NZ takes pro-active steps to improve the transparency of domestic trusts and introduces measures to improve the availability of accurate and up-to-date beneficial ownership. This, it says, could include consideration of a register of trusts.

"This should also include reviewing its framework for mandatory enhanced due diligence for trusts to ensure it is sufficiently tailored to the money laundering and terrorist financing risks," says FATF.

In addition NZ ought to implement measures to mitigate the money laundering and terrorist financing risks of nominee shareholders and directors and ensure full transparency.

"This could include requirements on such nominees to disclose their status and the identity of the nominator to MBIE and when dealing with reporting entities."

NZ should also ensure that trustees disclose their status to reporting entities when forming a business relationship or carrying out an occasional transaction, NZ should ensure that proportionate and dissuasive sanctions are available and enforced for breaches of basic and beneficial ownership information requirements, and NZ should consider developing a complete trust and company service provider register to be accessed by Anti-Money Laundering and Countering Financing of Terrorism Act reporting entities and other agencies.