Gareth Vaughan analyses the government's push to bolster transparency on the beneficial ownership of NZ companies, discovering lessons from the UK approach

By Gareth Vaughan

The Government's move to address the misuse of New Zealand companies by requiring more detail on their ultimate owners has been a long timing, and comes against the backdrop of some international pressure. But although the initiative is welcome, it's highly unlikely to be flawless.

The Ministry of Business, Innovation and Employment (MBIE) points out using registers to improve the transparency of beneficial ownership of companies and limited partnerships is a relatively new concept. Therefore there's limited international data and evidence on how well this works. These comments came in a Regulatory Impact Statement accompanying Commerce and Consumer Affairs Minister David Clark's announcement a bill will be introduced to Parliament later this year changing the rules around beneficial owners of NZ companies and limited partnerships.

This means the benefits and costs of introducing a unique identifier for individuals who are or become beneficial owners, directors or general partners in the same way unique NZ business numbers are issued to NZ entities, isn't easy to quantify by looking to overseas examples. This unique identifier, or corporate role-holder identifier, could take the form of a number, certificate or digital code.

By beneficial owner we are talking about what MBIE describes as the natural persons who ultimately own or, directly or indirectly, exercise effective control over a corporate entity rather than, for example, nominee directors and shareholders acting on behalf of someone else.

The United Kingdom (UK), which has run a publicly accessible centralised beneficial ownership register since 2016, is MBIE's "key source of overseas evidence." John Penrose, the UK Prime Minister’s Anti-Corruption Champion, wrote to Clark's predecessor Kris Faafoi in 2019, inviting him to consider establishing a public beneficial ownership register.

"He noted that their public register had:
a. allowed for greater oversight and scrutiny of UK companies by all stakeholders, which in turn has improved the quality and accuracy of the data.
b. helped companies and authorities reduce barriers and inefficiencies involved in obtaining timely access to beneficial ownership data for UK companies; and
c. improved their ability to counter illicit finance," says MBIE.

Problems in the UK

However, UK Naked Capitalism blogger Richard Smith, a long time observer and writer on company disclosure and misuse issues and sometime interest.co.nz contributor, highlights some notable loopholes and problems with the UK regime.

Firstly, Smith points to the UK's 25% disclosure threshold. 

"For some reason the UK decided to think about ‘persons of significant control’ rather than ‘ultimate beneficial owners’. So: the Financial Action Task Force [FATF] says 25% amounts to significant control - but that doesn’t mean a single 25% stake. It could mean five people with 5% each who all decided to vote the same way," says Smith.

"Thinking 25% means a single stake of 25% held by one person is a disaster. For instance here is a Scottish limited partnership taking the piss out of the rules by appointing five general partners, 20% each, geddit? And then saying that no one controls it."

"As a further piss-take, this partnership then turns up as the person of significant control/ultimate beneficial owner of a load more limited partnerships. So control/ownership of the whole lot is still shrouded in mystery and yet they are all in full compliance with our lovely new law!"

What about trusts?

Back in NZ the government's move to bolster beneficial ownership information for companies and limited partnerships doesn't extend to trusts. In 2018 when it first emerged this was the direction MBIE was heading in, MBIE came in for strong criticism from Ron Pol. Pol's a legal management consultant and principal at AMLassurance.com with a PhD on the policy effectiveness of anti-money laundering laws.

Below is MBIE's reasoning from a 2018 consultation paper for excluding trusts.

"Trusts would be captured by the options in this paper where the beneficial owners of corporate entities are people who control a trust. However, we have not considered a beneficial ownership register for trusts in this paper. Privacy and confidentiality have historically been recognised as among the essential virtues of trusts, and a register would be a significant departure from that. Further, a register would come with significant compliance costs to private individuals and businesses, and administrative costs to government. A register has the potential to be a significant change and require considerable analysis. As part of its review of the law of trusts, the Law Commission concluded that a system of registration for trusts should not be introduced for these reasons."

Pol described this reasoning for excluding trusts from beneficial ownership transparency as "remarkable for having been expressed out loud. Homer Simpson’s response comes most immediately to mind. 'Doh'."

In terms of the UK regime, Smith points to a problem with trusts including discretionary trusts.  

"Privacy concerns can be addressed by requiring ultimate beneficial ownership disclosure to the Registrar, but adding the option for the ultimate beneficial owner to request, with justifications, that his details not be published. Otherwise, any one-page signed agreement between a nominee shareholder and an actual beneficial shareholder counts as a trust, so you just disclose the nominee. Ask your friendly NZ trust lawyer - I think it will be the same over there," says Smith.

It is indeed the same in NZ. Tammy McLeod, Managing Director at Davenports Law and a trust and asset structuring specialist, says via a bare trust situation she could hold shares on trust for me, for example, with me as the ultimate beneficial owner.

"At the moment you can do that, absolutely you can do that for anything really. So it could be holding property or shares in a company or whatever on behalf of somebody else. It doesn't have to be a discretionary trust. It could just be that an individual's holding, or a company or anyone's holding, something on trust for somebody else," McLeod says.

McLeod adds that there's a range of legitimate reasons for people to use trusts.

Challenging 'all the nonsense'

Smith also notes "other unexpected stupidities" the UK has. These include:

a) the option to say ‘there is an ultimate beneficial owner but we haven’t got all his details yet.' And;
b) the apparent legal impossibility of challenging dubious looking filings allowing nameless and faceless people to say their companies are controlled by other anonymous companies in tax havens, or by two year-old children.

Additionally Smith points out UK company Inovita Ltd. It lists Stella Port-Louis of the Seychelles as the person with significant control. Port-Louis is best known in NZ for being a director of hundreds of NZ companies linked to the infamous Taylor shell company incorporating family. Interest.co.nz reported in 2018 that NZ Police had received more than 350 criminal investigation enquiries from overseas relating to NZ companies established by the Taylors.

Finally Smith says in the UK only Scottish limited partnerships have legal personality. This means English and Northern Irish limited partnerships aren't entities and can’t logically be controlled by anybody at all. 

"This has all been highlighted again by our recent attempts to freeze oligarch assets owned in the UK. We can’t identify them!!"

On the upside Smith says the problems have highlighted the Registrar’s inability to challenge "all the nonsense" that gets put on the register. The next round of register reforms will aim to tackle this. Last time he looked Smith says about 300,000 UK companies and partnerships still weren’t disclosing who was behind them, and says he's aware of a network of at least 60,000 UK companies whose disclosed ultimate beneficial owners aren’t really their ultimate beneficial owners at all.

In NZ Clark is suggesting the definition of “beneficial owner” should focus on people with “significant control” over a company.

"In particular I consider that this definition should capture individuals who:

hold, directly or indirectly, a minimum percentage ownership interest in a company or limited partnership, to be prescribed by regulations;
hold, directly or indirectly, a minimum percentage of the voting rights in a company or limited partnership, to be prescribed by regulations;
have the right, directly or indirectly, to appoint or remove a majority of the board of directors of a company or general partners of a limited partnership;
have the right to exercise, or actually exercise, significant influence or control over a company or limited partnership;
have the right to exercise, or actually exercise, significant influence or control over the activities of a trust or other organisation which is not a legal entity, but would itself satisfy any of the above conditions if it were an individual.

This list of criteria draws from the approaches taken in the United Kingdom, Hong Kong and Singapore," says Clark.

Exactly what the government proposes to include in the NZ Bill will be revealed in June when an exposure draft is released.

'What I don´t get is how the NZ government allows this to happen'

Although NZ companies currently provide information to the Registrar of Companies about their directors, and limited partnerships do so for their general partners, neither is required to identify their beneficial owners being the natural persons who ultimately own or, directly or indirectly, exercise effective control over a corporate entity. Because of this Clark says legal entities are at risk of being misused by criminals wanting to distance themselves from their criminal proceeds, and NZ’s framework on transparency of beneficial ownership information doesn't meet international best practice.

In its latest assessment of NZ, released last April, FATF identified the lack of transparency of beneficial ownership information in NZ as a key deficiency in the country's framework to combat money laundering and terrorism financing. It was the top priority action identified in the report. FATF, of which NZ is a member, is an inter-governmental body that sets standards for combatting money laundering, terrorist financing and other related threats to the integrity of the financial system. 

FATF also 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 by the Reserve Bank, FMA or the Department of Internal Affairs.

Improving the transparency of beneficial ownership is proving a slow burner for NZ. It emerged in 2017 that MBIE was considering the creation of a public central register of company beneficial ownership information following a commitment made at a London Anti-Corruption Summit in May 2016, which was attended by then-Police Minister Judith Collins. 

A consultation paper followed in 2018. Progress since then has been delayed by Covid-19 and while funding issues were worked through, a spokesman for Clark told interest.co.nz last year.

In the meantime the need for action has been reiterated to me once again this week. This stems from being contacted by a Spanish investor in unregulated NZ banking service provider Vivier and Company, which he discovered through a Spanish website. Promised a 5% interest rate for a three-year investment, he says he's now owed €5,000 plus interest.

The investor had questions about Vivier being put into liquidation at the behest of another investor seeking to recover more than $2.3 million. As previously reported by interest.co.nz, Vivier appears to have been controlled through a range of nominee directors and shareholders by convicted UK fraudster Ian Andrews, formerly Ian Leaf, although he denies this. 

Ultimately the out of pocket Spanish investor says; "What I don´t get is how the NZ government allows this to happen." Indeed.

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