The global anti-money laundering watchdog suggested NZ consider developing a register of trusts. But even as it bolsters beneficial ownership information on companies & limited partnerships the government isn't taking this advice. Why?

By Gareth Vaughan

The government's push to improve transparency on the controlling owners of New Zealand companies and limited partnerships begs the question; What about trusts?

Where criminals obscure the true ownership of a corporate entity using nominee directors and shareholders, a web of shell companies, intermediaries and complex business structures based in multiple jurisdictions, trusts can and do feature. Such complex ownership structures can be used to enable investment scams, money laundering, terrorism financing, drugs or arms trafficking, tax evasion and to hide assets. (See more on this here and here).

Information about the beneficial, or controlling, 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. Beneficial owners are described as "the natural persons who ultimately own or, directly or indirectly, exercise effective control over a corporate entity." 

Although the government's move to boost the clarity of who really controls NZ companies and limited partnerships is designed to combat the use of them for nefarious purposes, it will also impact companies and limited partnerships used for perfectly legitimate purposes. And these make up the vast majority of the estimated 693,000 registered companies and 3,300 registered limited partnerships. So why is this happening?

Revelations about NZ entities in the likes of the Panama and Pandora papers were bad for the country's reputation, and international pressure has mounted for action. A commitment was made at a London Anti-Corruption Summit in 2016, attended by then-Police Minister Judith Collins, for NZ to explore the establishment of a public central register of company beneficial ownership information.

Ministry of Business, Innovation & Employment (MBIE) consultation followed in 2018, and now Commerce and Consumer Affairs Minister David Clark says a bill will be introduced to Parliament this year changing the rules around beneficial owners of NZ companies and limited partnerships in an attempt to to make it easier to tell who the ultimate owner or controller is, and thus reduce misuse of these entities.

So what about trusts?

Further international pressure to shed light on company ownership comes via the Financial Action Task Force (FATF), which is considered the global money laundering and terrorist financing watchdog. NZ is a FATF member. In a review of NZ issued last year FATF also suggested NZ ought to consider developing a register for our estimated 500,000 domestic trusts.

"New Zealand should take pro-active steps to improve the transparency of domestic express trusts and introduce measures to improve the availability of accurate and up-to-date beneficial ownership. This 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/terrorist financing risks," FATF said.  

Transparency International NZ Director Adam Hunt is someone who would like to see a trusts register established. Asked whether he thought a trusts register would be a good anti-money laundering (AML) tool Hunt says the short answer is yes. He also believes it could reduce compliance costs for people who have trusts.

"We assume a registry is going to be a burden but if it is done well, and I know that's a big ask, then this could actually save a shedload of compliance costs within the New Zealand business and private community. And I'd just love to see the government seize that opportunity," says Hunt.

Hunt suggests starting with a voluntary trusts register. This could feature basic information such as the names of the trust, trustees, settlor and the beneficiaries. If the details are verified, this information could be relied on for AML purposes, he says.

"Can you imagine how much money that would save people all over New Zealand? Because every time the bank, the lawyer needs to do anything, you can just do this very, very simple validation process."

"And you could do it all and increase privacy because at the moment when you need due diligence carried out on a trust you have to send a copy of the trust deed to a real estate agent or whoever. So you've got copies of all these documents sitting in filing cabinets all over New Zealand. The security on these issues alone is a nightmare. Or you could have a central register and you rely on it and you don't have to do all that. You don't have to have all those copies of stuff sitting around. It just makes sense," Hunt says.

Trusts can obscure control

Details of the trust's trustees, settlor and beneficiaries should appear on the register, Hunt reckons. The settlor establishes the trust, appoints the trustees and chooses the assets that will be held by trust. The trustees control the trust and effectively hold the assets owned by the trust on behalf of the beneficiaries. This role is often filled by lawyers or accountants. The beneficiaries are the people who benefit from the trust. 

"The settlor is often effectively the beneficial controller. Legally they're not because the whole point is the trustees are the controllers of it. And this is why trusts are subject to enhanced [AML] due diligence. People complain about it, but the simple answer is well, this is why it has to be this way because trusts can obscure that control," says Hunt.

Hunt argues names should be public unless there's a good reason for them not to be. In terms of beneficiaries, some generic categories could be established such as "my children." 

"The other angle on this is that it would also cull out the noise. Because we have so many trusts in New Zealand and 80% of them are pointless, it generates a lot of noise. So it camouflages the naughty trusts," says Hunt. 

"So if you can cull out, perhaps with a voluntary register the simple family trusts that have got the bach in them that has been there for 100 years and all that stuff, it would be really good because that would clear the way for focus and attention to go onto the naughty trusts."

"if there are professional trustees on there their names can't be masked. I think that would be really important because if your job is being a trustee then you shouldn't go and hide that," Hunt says.

'Balanced, nuanced approach needed'

Barrister Gary Hughes, who chairs the International Bar Association’s AML & Sanctions Experts committee, has a different take on whether NZ should have a register for domestic trusts.

Hughes says you can look at it from the point of view of an AML reporting entity such as a bank or real estate agency, from the point of view of law enforcement agencies, and from the point of view of Joe Public.

"My view is it has to be a balanced, nuanced approach across those three perspectives," says Hughes.

"AML reporting entities have to find out details about beneficial ownership of their customers. That has been there for years and what's happening is the FATF is steadily ratcheting up the recommendations and best practice pressure upon member governments."

AML reporting entities have to face these issues daily, Hughes notes, whether it's dealing with a new account, a new client or a new customer, for example.

"They do their due diligence on three categories of people, which is the customer, who could be a company or limited partnership or an individual, and then also on a person acting on behalf of the customer, so for a company that might mean the CEO or managing director. Then there's the third category which is the important one, doing due diligence on any beneficial owner of a customer as well," Hughes says.

"That can send entities on this lengthy quest going down various rabbit holes to get information and find out who those beneficial owners are in different ways. It is a source of compliance burden and a challenge. [Although] sometimes it's easy enough if it's a company and they have straight forward shareholding, or few above the prescribed percentage thresholds."

Then if a trust is involved the AML law requires what's known as enhanced customer due diligence, being an additional layer of enquiry into trusts.

"So entities are already doing that, but they basically have to work through public domain searches to the extent they can and by going back through the account or the facility to ask the customer, or the instructing lawyer or real estate agent," says Hughes.

He suggests reporting entities would benefit from access to better information about beneficial ownership to make their enquiries easier.

"If there's to be some sort of beneficial owner law they would really like a register where at least with regulated entities, maybe their compliance officer, could have careful secure access to that. That would be helpful and a big step forward," says Hughes.

Meanwhile he says law enforcement agencies such as the police would definitely want access to such a register too, so they "can find out exactly who they are sanctioning and where the assets are held."

Caution over 'blunt approach that all trusts are bad'

Beyond this Hughes argues there's a more controversial issue of where journalists and members of the public and "everybody with an opinion on twitter" would like to have access to general beneficiaries registers as well.

"And that's where things get a little bit more complex," says Hughes.

"I’m not sure there's good justification for that necessarily, because information can be misused. People should still have some vestige of privacy rights. And although there's undoubtedly a minority of criminal activities through trusts, there's also an awful lot of completely benign, legitimate trusts out there for a range of reasons - iwi trading trusts, mum and dad trusts that don't do anything more than hold the family home or the bach. I don't see huge risk there usually." 

"One problem we've got is public perception and media is starting to take this blunt approach that all trusts are bad. I think that's unbalanced and what it actually leads to is the small percentage of really dodgy trusts gets lost in the wash, if you take a one size fits all approach. We need to find more nuanced ways of focusing on the truly high risk areas of trust activity," Hughes says.

"I have some sympathy with a need to find a balance that protects privacy."

That's not to say trust register information shouldn't be made available to the likes of law enforcement agencies and the Companies Office if there's to be a register for trusts.

"What’s called a 'closed register' would be only searchable by government agencies. But a middle ground would allow, on some controlled terms, and signed confidentiality undertakings, for an AML compliance officer to have proper access to it so they can discharge their due diligence work, that would be sensible," says Hughes.

But he doesn't believe there's a need to go further and make every private detail about trusts publicly available. Hughes notes Inland Revenue has some oversight of domestic trusts already, with them required to make an annual declaration for financial year end purposes. Inland Revenue also has a specialist AML unit.

"It's not IRD’s core task to look at this sort of stuff, but tax evasion is core business, and that can easily be a predicate crime for money laundering," says Hughes.

Following bad international publicity for NZ foreign trusts stemming from the Panama Papers in 2016 the government stepped up disclosure rules for foreign trusts, which must now register with Inland Revenue. This has led to a dramatic reduction in the number of foreign trusts.

Hughes says he sees a stronger argument for more disclosure around foreign trusts than domestic trusts.

"The idea that people entirely resident overseas can put their assets in a New Zealand trust and just store or stash them here, well there might be legitimate and lawful reasons for that, such as planning to migrate to NZ. But they seem much less compelling to me than a New Zealand citizen with a business or a family enterprise or property investments or whatever, things are probably very closely tied to New Zealand. In any event, local trust assets are likely to be under the oversight of government in various other ways," says Hughes.

Government accepts Law Commission advice against trusts register

The United Kingdom has a trusts register run by HM Revenue and Customs. It's not a searchable public one. MBIE is using the UK as its "key source of overseas evidence" as it moves to improve the transparency of the beneficial ownership of NZ companies and limited partnerships. However, Commerce and Consumer Affairs Minister David Clark says there are no plans for a trusts register in NZ.

"There is a register of companies and a register of limited partnerships. The reforms announced mean that those registers will contain information not only about who the shareholders and directors are, as currently, but also about who the beneficial owners are. If a company or limited partnership includes a trust in its corporate chain of ownership, then the trustees of that trust may qualify as the beneficial owners," says Clark.

"In practical terms, this means where a trust has any beneficial interest in a company, we will now be collecting all kinds of information we were not collecting before. The changes mean we will be able to look through those trusts where required."

"By contrast, there is no register of trusts. The Law Commission recommended against creating such a register in its 2013 report. The Government accepted that advice when it passed the Trusts Act 2019," Clark says.

In its report the Law Commission said after carefully considering the case for registration it concluded a system of registration for trusts shouldn't be introduced. The Law Commission reviews NZ law and makes recommendations to government.

"We did not consider the benefits of registration to be sufficient to warrant the introduction of a registration requirement for trusts. Our main reasons were that a register would significantly alter the nature of trusts by giving them a publicly registered status. We considered that this would be a significant shift away from the current treatment of most trusts as essentially private arrangements between citizens. We also questioned whether some of the 'problems' identified by some people should truly be viewed as problems," the Law Commission said.

"Some of those calling for registration identify the private nature and confidentiality of trusts as a significant problem. However, privacy and confidentiality have historically been recognised as among the essential virtues of the trust form. We also concluded that the overall costs associated with registration are a significant barrier."

Inland Revenue, Stats NZ & RBNZ support for a trusts register

The Law Commission report says most submissions received during the review firmly opposed the introduction of registration requirements for trusts. However, three significant submissions from government agencies supported registration for trusts. These came from Inland Revenue, Statistics NZ and the Reserve Bank.

Inland Revenue suggested either a compulsory or voluntary register for trusts operating as businesses, saying these could, for example, be defined as all trusts registered for Goods and Services Tax.

"It considers that the value of privacy in trusts needs to be balanced against the rights of creditors to know who they are dealing with in a commercial world. Its view was that, in an open market economy like New Zealand’s, the default position should be transparency in relation to business or asset-holding entities, unless there is a good reason why this should not be the case. It submitted that compliance costs associated with registration could be reduced by utilising an existing register, such as the Companies Register," the Law Commission said.

"We concluded that a voluntary register would only be effective if there were incentives for trustees to register information about the trust. If corporate trustees were required to disclose their status as trustees in some way, a voluntary register could provide a straightforward method for them to disclose."

Statistics NZ supported the establishment of a trust register because of its potential to improve the statistical information needed to inform key policy areas.

"Its submission highlights issues around the accuracy of data currently collected and available on trusts and the importance of accurate data for the national accounts, measurements of New Zealand’s international investment position, and measurements of household savings and wealth used to support social, monetary and retirement policy," the Law Commission said.

The Reserve Bank also backed a trust register, even a closed register rather than a searchable public one, to help improve the accuracy of economic data.

"The Reserve Bank identified problems with having to rely solely, as it currently does, on data from the Household Saving Survey and the Annual Enterprise Survey. The Reserve Bank considered that data on the total assets and liabilities that trusts hold would be likely to improve national measures of wealth and saving. It stated that accurate economic information has always been important, but has become more significant in the wake of the global financial crisis."

"The Reserve Bank argued that the need for adequate economic statistics was of itself sufficient to justify the establishment of a closed register for trusts. It suggested that the register should capture details of assets and liabilities of all trusts so the information can be used at an aggregate level but that information about individual trusts need not be made public. The Reserve Bank argued that even a register that shows only how many trusts exist would be valuable. The Reserve Bank could then survey samples to get reliable aggregated information on wealth and assets," the Law Commission said.

"The Reserve Bank suggested that the current requirement for income-earning trusts to register with Inland Revenue should be expanded to cover all trusts, whether income-earning or not, to create a simple register. Inland Revenue would keep and maintain the register as a closed register."

Verification needed

Hunt says beneficial ownership registers haven't been very successful in a number of jurisdictions, including the UK, because those filing company information have been able to say what they want with nobody really checking -or verifying - the detail. However a new FATF recommendation calls for beneficial ownership information to be verified.

"How that verification is executed will be very interesting. And personally my argument would be if we take a positive approach to this and ask what value we can generate out of this process, then one of the things that could happen is it could make due diligence for anti-money laundering and countering the financing of terrorism much, much easier. And it could take a huge amount of compliance costs out of the economy because the standards for AML evidence identity has to be a government source and it has to be reliable," says Hunt.

"If the Companies Register was a reliable government source because it was verified then it means the companies who have to do AML processes would be able to rely on the Companies Register which they can't at the moment.'

Hunt says his "fantasy" is for some financial information about the companies to be published as well.

"It's all well and good knowing who the beneficial owner is, but the beneficial owner of what?"

He suggests publishing generic information, on say companies' revenue, based on a banded structure as some corporates do with staff salaries. This would give an idea of how big the entity is.

Meanwhile, Hunt says the information technology (IT) side of providing more transparency around company and limited partnership ownership is likely to be challenging for MBIE. Hughes agrees there's a big job ahead.

"Our [Companies] Registry's probably a little bit better than the UK's Companies House, but they're still not properly resourced to go and exhaustively check the verifying data on all things that are filed with them either. So they've got a huge job ahead if they're going to gear up their systems to check the validity of everything that's sent in for filing," says Hughes.

Clark says the beneficial ownership push will be funded with a $5 million capital injection to build a new register and/or amend the Companies Office registers, a one-off investment of $1.6 million to $1.8 million for operating costs for an education campaign on the new requirements and IT work, plus ongoing operating costs estimated at $3.4 million annually for management and maintenance of the registers, awareness and education work, an enforcement capability and the associated depreciation and capital charge. This will come from the Proceeds of Crime Fund managed by the Ministry of Justice.

Clarity on definition of 'beneficial owner' called for

In a note on the government's plans law firm MinterEllisonRuddWatts points out that while “beneficial owner” is a key concept under the Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) Act, Cabinet proposes to use a modified definition of “beneficial owner” for the Companies Act and Limited Partnership Act with the current statutory review of the AML/CFT Act being undertaken by the Ministry of Justice.

"The relevant Regulatory Impact Statement also states that MBIE officials 'do not anticipate a precise alignment' between the two 'beneficial owner' definitions, particularly as the proposed measures specifically target how beneficial ownership works in a limited partnership or company structure and it being used in a specific context under the AML/CFT Act. If the definition is not to be aligned, it may substantially undermine, and makes us question, the value of making beneficial ownership public on the relevant registers. The registers may be weak as a form of verification for AML/CFT reporting entities who are conducting customer due diligence, in accordance with the AML/CFT Act, in relation to information declared to it by beneficial owners," MinterEllisonRuddWatts says.

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