Transparency International calls for an end to the ability for the ultimate owners of NZ foreign trusts to avoid tax and financial transparency obligations in their home countries

The Pandora Papers have once again shone a spotlight on New Zealand foreign trusts, with Transparency International calling on the Government to remove the ability for settlors of these trusts to avoid tax and financial transparency obligations in their home country.

The Pandora Papers detail the leaked records of 14 offshore financial services firms obtained by the International Consortium of Investigative Journalists (ICIJ). They show business people and politicians from Russia, Romania, China and Brazil using NZ foreign trusts to build and hide their wealth. They also show NZ foreign trusts holding hundreds of millions of dollars for the Legion of Christ, a wealthy Roman Catholic order disgraced by an international pedophilia scandal.

Transparency International New Zealand notes that, unlike other jurisdictions, NZ foreign trusts are taxed based on the residence of the settlor, or the ultimate owner, rather than through the residency of the trustee who is NZ based.

Therefore so long as the settlor and assets of the trust are located overseas, the trust won't be subject to NZ tax. And although Inland Revenue holds information on all NZ foreign trusts, this information isn't publicly available. Inland Revenue does, however, share information on foreign trusts with the Department of Internal Affairs, which supervises them for compliance with anti-money laundering and countering the financing of terrorism legislation, and the Police Financial Intelligence Unit.

However, Transparency International NZ chief executive Julie Haggie wants more done.

"New Zealand should remove the ability for settlors to avoid or hugely mitigate tax and financial transparency obligations in their own country," Haggie says. 

"Transparency International also favours much greater transparency of New Zealand based foreign owned trusts because, as the Panama and Pandora Papers have and will show, it is transparency that shines the light on the corrupt."

Bad publicity for NZ stemming from the ICIJ's Panama Papers saw the previous Government introduce new requirements in 2016 for foreign trusts to register with Inland Revenue and provide key information. 

According to Inland Revenue, there are now 2,690 active foreign trusts. That's down more than 75% since the post-Panama Papers changes.

A spokesman for Revenue Minister David Parker says a proposal to address the use of foreign trusts as tax free vehicles remains on the Government’s tax policy work programme.

"As you may be aware, earlier this term the Government increased the reporting requirements on domestic trusts to improve Inland Revenue’s oversight of New Zealand’s domestic trust sector," Parker's spokesman says.

"The changes implemented following the 2016 'Government Inquiry into Foreign Trust Disclosure Rules' significantly increased the reporting requirements on foreign trusts. Recent international reviews have confirmed that our foreign trust reporting regime meets all requirements for the collection of beneficial ownership information – an important measure of transparency.  These rules have allowed greater Inland Revenue oversight of the industry."

"IRD has an ongoing compliance programme covering foreign trusts and the major changes in transparency requirements (mentioned above) from 2016 have made a difference.  The new disclosure rules have been a success in weeding out inappropriate use of trusts with the number of overseas trusts having fallen from 11,671 between May 2016 and now," says Parker's spokesman. 

Issues with domestic trusts too

Releasing its assessment of NZ in April, the Financial Action Task Force (FATF) recommended NZ consider developing a complete trust and company service provider register to be accessed by Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Act reporting entities and other agencies. Reporting entities are  the likes of banks, law firms and real estate agencies who are supervised for compliance with the AML/CFT Act.

The Paris-based FATF is an inter-governmental body that sets international standards and is considered the global money laundering and terrorist financing watchdog. 

There are estimated to be as many as 500,000 trusts in NZ. There are also more than 25,000 charitable trusts registered with the Charities Services, and in excess of 26,000 incorporated charitable trusts. 

Haggie points out that FATF is reviewing the effectiveness of its Recommendation 25. This urges countries to have “adequate, accurate and timely information on express trusts, including information on the settlor, trustee and beneficiaries that can be obtained or accessed in a timely fashion by competent authorities.“

"New Zealand is co-chairing the review of Recommendation 25, and Transparency International will be an active advocate for this review," Haggie says.

Among the priority actions FATF recommended for NZ in its April report 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.

Information about the beneficial ownership of NZ companies isn't currently collected by the Ministry of Business, Innovation & Employment'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. 

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. 

“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 in March.

On Tuesday Clark's spokesman said policy work is still ongoing and the Government's position remains largely unchanged from March. He says Cabinet is aiming to make decisions later this year or at the start of 2022.

*A version of this article was first published in our email for paying subscribers early on Wednesday morning. See here for more details and how to subscribe.