Registered here and operating overseas: Three building societies feature US$5.5 bln of mine assets, Danish regulatory wrath, and a ready mix concrete expert

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By Gareth Vaughan

Think of building societies in a New Zealand context and you probably come up with conservative regional entities owned by their members offering them home loans and term deposits. But there's much more to it than that.

New Zealand has at least three registered building societies plying their trade overseas, largely slipping through the regulatory web. They are General Equity Building Society, Kiwi Deposit Building Society and Safe and Sound Building Society.

Services offered through General Equity's website include trust and structuring services, instruments verification and online banking.

Kiwi Deposit offers savings, investment, credit and asset management services targeted at the sophisticated investor.

Safe and Sound offers home and business loans, merchant banking services, term deposits and investment bonds from a minimum $500,000, also saying it targets sophisticated, rather than "ma and pa" retail investors.

Enquiries by Interest.co.nz also show;

1) A General Equity Building Society fund claims to hold almost US$5.5 billion of equity through unnamed mines, gold, silver and granite ore.

2) A key player at General Equity, Anthony James Scott, now described as senior legal adviser, resigned as secretary on August 10, 2009, the day before a man of the same name was banned by the Australian Securities and Investments Commission (ASIC) from managing a corporation for 18 months. Scott resigned as a General Equity director on September 9, 2009.

3) General Equity has noted "with great interest" Prime Minister John Key's idea of positioning New Zealand as a financial services and funds hub and says it's "well placed to facilitate the provision of its financial services in furtherance of this government policy initiative."

4) A wholly-owned Danish subsidiary of Kiwi Deposit Building Society was referred to the police by Denmark's equivalent of the Financial Markets Authority - Finanstilsynet - two years ago after buying into a sharemarket listed Danish company and waiting nine days before informing the market of its obligation to make an offer to minority shareholders. It was fined.

5) Kiwi Deposit also owns an Irish company named the Bank of Bournemouth Ltd, and real estate in Britain and Sweden.

6) A New Zealand-based director of Safe and Sound Building Society with a background in ready mix concrete, Frederick Frtiz Mendl Stonnell, says he's only on the board because the Australian based CEO, a relative, asked him, and he has no financial services experience. This is despite his New Plymouth address being listed as the office where Safe and Sound's records are held.

7) Among other hardships to strike their business, the directors of Safe and Sound cite "earthquakes affecting the capital of the nation" without specifying which country they are referring to and - aside from New Plymouth - only citing offices in Auckland and Queensland.

8) There is concern in New Zealand’s financial sector about the ability of New Zealand registered building societies to operate overseas largely free of regulatory oversight with Ross Smith, the CEO of SBS Bank which is also the country's biggest building society, saying he's "naturally concerned" about the sector's and country's reputations. The Reserve Bank doesn't monitor the overseas transactions.

Registered at MED

Incorporated under the 1965 Building Societies Act, the three are registered through the Ministry of Economic Development (MED) run Building Society Register. This is part of the broader companies registration system, which the World Bank and International Finance Corporation rank as the easiest out of 183 countries surveyed.

As building societies they're able to offer banking services outside the Reserve Bank’s non-bank deposit taker regulatory regime because they don't take deposits from the New Zealand public. They can therefore operate freely overseas with New Zealand's good reputation, highlighted by Transparency International ranking New Zealand the least corrupt country, also of 183 surveyed, behind them.

The key day-to-day players at both Safe and Sound and General Equity appear to be Australian and, despite several attempts via email and phone to reach them, they were reluctant to talk to interest.co.nz.

In stark contrast, Kiwi Deposit Building Society's Auckland-based managing director Lachlan Williams was willing to talk, especially about the entity's ambitions to roll out financial services within New Zealand, which he said would ultimately target "ma and pa" retail investors as well as those legally classed as sophisticated investors.

Williams said Kiwi Deposit wasn't "freeloading" on New Zealand as a "fabulous jurisdiction" from which to run a global financial services business, and ultimately wants to take deposits from the New Zealand public and offer "vanilla" mortgages, seeing an opportunity through "insufficient" domestic competition.

1) General Equity: Mines, gold, silver & granite ore

The 2011 annual report from the General Equity Building Society Asset Builder Fund 1, audited by Ari & Co Chartered Accountants of Kuala Lumpur apparently in line with applicable approved New Zealand accounting standards, says the Fund principally manages assets and provides financial support for trade instrument issuance and venture capital activities. It says it holds property and plant valued at US$5.45 billion as of June 30, 2011, up from US$1.29 billion a year earlier. It lists total equity of US$5.48 billion, up from US$1.37 billion.

In explanation the annual report says: "The Fund increased its shareholding and interest to controlling interest. Further development in each of the mines grew the reserve to 9.995 Moz of gold and 7,787,500 ounces of silver and 15,881,458 tons of granite ore."

"The frontier value of the three primary assets is US$18,123,724,940. The total mine asset value is US$9,968,048,717. (Price per ounce - Au: 1,500, Ag:35.00) (Quality Granite: 180/mt)."

The Fund's annual report was signed by fund managers John Kortum and Steven A. Hensen. Kortum is also listed as a director of General Equity Building Society, alongside a Steven Adrian Hensen. General Equity Building Society's 2011 annual report says security pledged under Bills of Exchange worth US$448.9 million were released and placed in the Fund. It said the net assets of US$5.48 billion were "under the Society's management."

The Society's 2011 annual report also says the mandate of the Asset Builder Fund No. 1 is to write trade finance business for members and partners in the US, Europe, Middle East, Africa, Russia, Asia and Oceania.

'No tax return filed since inception', Cayman Islands link, an ex-mayor & former disqualified director

Meanwhile, a 2010 annual report filed by General Equity Building Society to the Building Societies Register includes an audit report from KPMG. It noted General Equity hadn't filed tax returns since inception in 2007.

KPMG also said related parties owing US$4.8 million to General Equity, including the ultimate parent company General Equity Services (Hong Kong) Ltd, were unable to provide sufficient evidence of their ability to repay related party advances or the likely timing of any repayments.

The auditor said it had been unable to obtain sufficient evidence of the value of assets pledged as security to guarantee the value of the related party receivables, noting General Equity Services (Hong Kong) Ltd's 55% stake in what's described as algae to hydrocarbon intellectual property. The annual report notes the establishment of a mutual fund in the Cayman Islands to raise US$50 million for 10% of this algae to hydrocarbon intellectual property.

General Equity has been chaired by Brian Joseph McGrath, the Lord Mayor of the Victorian town of Horsham from 1974-75.

Former secretary and director, and now senior legal advisor, Anthony James Scott appears to be the Melbourne man of the same name disqualified from managing a corporation by ASIC from August 11, 2009 until February 2, 2011. Scott responded to phone calls and emails from interest.co.nz with a short statement that didn't answer the question of whether he was indeed the Anthony James Scott banned by ASIC:

"In reply to your recent email enquiry I advise I am not a director of the Society but I am engaged as a Legal Officer," Scott wrote.

"The policy of the Society is not to give interviews to the media and obviously I am unable to make any comment regarding clients as that is subject to privacy laws and is confidential. You may submit any questions you have in writing to the board of directors who will give you a written response. Please find attached a copy of the 2011 Annual Report of the Society which should clarify matters and answer your questions."

A follow up email from interest.co.nz with questions sent to Scott and General Equity's administration address is yet to be responded to. Interest.co.nz purchased from ASIC, last week, a copy of Scott's notice of disqualification for A$36. ASIC required it be posted to an Australian address which interest.co.nz supplied, and to which it was delivered in heavy rain and poor quality. See the notice of disqualification here. The disqualification was made under Section 206F of the Corporations Act 2001.

BNZ account service, NZ funding

General Equity's 2011 annual report supplied by Scott notes a "nostro account service" with BNZ, says the Society has become a member of Swift, has established a Visa card for members, has established a "formal relationship" with a large un-named security house in Tokyo, and includes a clean bill of health from a new auditor, the Melbourne-based Lawler Draper Dillon.

Total assets, as of March 31, 2011, are put at US$5.4 million, total liabilities at US$2.79 million and total equity at US$2.6 million. The annual loss was US$558,895 after a US$139,940 income tax benefit.

A breakdown of General Equity's concentration of funding by geographic region shows almost US$2.2 million of a total US$2.6 million from Japan with US$158,654 from New Zealand. The financial statements also show US$2.4 million of member deposits.

It notes that Capstone Partners Australia has given the algae to hydrocarbon intellectual property a post-tax net present value of A$34 million, based on a model assuming an eight times earnings before interest and tax performance in year 10 and a 40% discount rate.  General Equity also refers to an announcement about the intellectual property by Hong Kong private equity group WWCC Ltd and Australia's Flinders University, WWCC's executives include Steven Hanson and John Kortum, with a third General Equity director, Mark Bayoud, named as a spokesman.

"WWCC Limited felt comfortable that it could raise US$50,000,000 for 10% of the algae to hydrocarbon intellectual property and invested in this outcome accordingly," the annual report says.

In its application for certificate of incorporation with the Registrar of Building Societies, General Equity lists 20 members, with all companies giving Auckland addresses. The bulk carry the level 27, PwC Tower, Quay Street address where a virtual office service is available.

2) Kiwi Deposit: 'Not freeloading off New Zealand as a fabulous jurisdiction'

Lachlan Williams, the founder as well as managing director of Kiwi Deposit Building Society, provided interest.co.nz with a copy of Kiwi Deposit's most recently released annual report, which he said MED had neglected to post online via the Building Societies Register.

Although its clients are currently overseas, and sophisticated investors rather than "ma and pa" retail investors, Williams said things were poised to change.

Kiwi Deposit is planning to launch a web-based currency trading platform and an Australian and New Zealand equity fund, with the latter to be "wrapped into" a New Zealand unit trust and then offered to New Zealand investors, probably having sought Portfolio Investment Entity (PIE) tax status. The annual report even suggests KiwiSaver products could be on the cards.

"Initially the focus is still on non-retail investors but the idea is to take that retail once we've adhered to the proper regulatory requirements," Williams said. "So if the angle of your story and your inclusion of Kiwi Deposit is to say something about us trying to abuse the New Zealand jurisdiction to focus only on non-residents, it's not the case at all."

Kiwi Deposit has been around since 2009 and Williams said given it's a trust business, it does have interesting clients.

"We have set up a banking business, if you like, a business that will be offering its own financial services products," Williams added. "But the idea is not to free ride off New Zealand as a jurisdiction, which is a fabulous jurisdiction. The idea is to make a contribution locally, to offer products locally and we think there's not enough competition and we see an opportunity."

'Registered in NZ due to Danish connection', owns British & Swedish real estate

Williams said Kiwi Deposit chose to register in New Zealand because of its association with the Danish-headquartered trust and corporate services company Equinor, which has had a New Zealand subsidiary - Equinor Trust Limited, since 2004. Williams has been the chairman of the Copenhagen headquartered Equinor International A/S since last November.

The annual report shows subsidiary Kiwi Deposit Holdings A/S with a 45.07% stake in Blue Vision A/S, whose website says it has a portfolio consisting of renting (sic) property and development projects, with a focus on real estate investment and development properties. A 2010 press release from Finanstilsynet, translated from Danish for interest.co.nz, shows Kiwi Deposit Holdings courted the regulator's ire when buying into Blue Vision, from which Kiwi Deposit says in its annual report it "expects significant positive income contribution" from.

Here's the translated version of Finanstilsynet's 2010 statement:

The Financial Supervisory Authority’s decision of 15 March 2010.

The FSA has decided to refer Kiwi Deposit Holdings A/S to the police for failing to comply with the company’s obligation to issue immediate notification of their acquiring a majority shareholding which should have triggered a mandatory offer obligation pursuant to Section 2, subs. 1. The case has been referred to the Securities Council.

On 16 Sept. 2009 Kiwi Deposit Holdings A/S acquired a majority shareholding in Blue Vision A/S. However, the FSA found that notification of the acquisition of the majority shareholding in Blue Vision A/S and the mandatory offer obligation were not publicised until 25 Sept. 2009.

Kiwi Deposit Holdings A/S has stated that the remissness was due to a misinterpretation of a special rule in a special law and that this misinterpretation did not mislead the market.

It is the FSA’s view that after acquiring the majority shareholding which triggered the offer obligation pursuant to S. 2 subs. 1, Kiwi Deposit Holdings A/S was in breach of the duty to publicise immediately pursuant to S. 4 subs. 1 of Order no. 947 of 23 Sept. 2008 concerning take-over bids.

Asked for comment, a Finanstilsynet spokesman told interest.co.nz that due to regulatory confidentiality the only option he had was to refer to this public announcement.

In response to the Finanstilsynet statement Williams provided interest.co.nz with the following:

On 16 September 2009 Kiwi Deposit Holdings A/S acquired a controlling interest in Blue Vision A/S, a company listed on the NASDAQ OMX Copenhagen, from Financial Stability, an arm of the Danish state. At the time, Blue Vision A/S was a listed shell with no material operational activities and the stock was illiquid.

While Kiwi Deposit Holdings A/S immediately informed the market of its acquisition, it inadvertently delayed informing the market of its corresponding obligation to make a mandatory offer to minority shareholders until 25 September 2009 – a delay of nine days.

Our then Danish lawyer, Mr Torben Mauritzen of Nordia Advokatfirma, failed to properly advise us in relation to the proper handling of this announcement. The delayed announcement was in no way intentional. The Danish FSA referred the matter to the Danish police as is standard practice with all such securities law matters under Danish law.

Kiwi Deposit Holdings A/S admitted the procedural breach and was fined DKK 50,000 (about NZ$10,800) on 16 June 2010.

On 17 February 2012 Kiwi Deposit Holdings A/S filed a claim with the City Court at Copenhagen for negligent advice against Nordia Advokatfirma, and a professional conduct matter against Mr Torben Mauritzen was referred to the Danish law society. The negligence claim remains pending.

No stock in Blue Vision A/S was traded between the date of acquisition and the delayed announcement. It is our view that no investor in Blue Vision A/S suffered any material loss from the miscommunication. Kiwi Deposit Holdings A/S now retains alternative and higher quality Danish legal advisers.

Blue Vision's chief financial officer, Casper Slumstrup, is listed in the annual report and Building Societies Register as a Kiwi Deposit Building Society director. However, Williams said Slumstrup has "amicably ceased" being a director.

Kiwi Deposit's annual report notes a profit before tax of €787,845 for the period from March 13, 2009 to December 31, 2010, and a net loss of €887,082. It lists €1.2 million of income tax paid. An audit report from PKF Ross Melville emphasises that cashflow commitments to financial liabilities exceed cashflows available from financial assets, but says directors are confident the group will continue as a going concern.

The annual report notes total assets of just under €31.2 million, total liabilities of €17.6 million, and total equity of almost €13.6 million, and says €6.2 million of deposits were taken between March 2009 and December 2010. It also notes that Kiwi Deposit has issued almost €13.5 million of new equity to fund real estate acquisitions in Britain and Sweden, and will launch a global equity fund - domiciled in Malta - during 2012.

Kiwi Deposit Building Society also has other subsidiaries including the wholly owned Irish company the Bank of Bournemouth Ltd, which owns 100% of another Irish company, Broadford Properties Ltd. It also owns a Swedish company, Lark Sverige AB, and an English company Ely Investments Ltd. Overall the annual report shows €19.4 million of real estate holdings including a warehouse in Bournemouth, apartments in Torquay, an office block being renovated into a hotel in Malmo, and residential, leisure and office properties in Kalmar, Sweden.

Deposit taking ambitions due to 'insufficient' NZ competition

A "medium term" objective of Kiwi Deposit's is to set up a subsidiary that takes deposits from the New Zealand public, Williams said, and be prudentially regulated by the Reserve Bank.

"We'd like to run a domestic loan book as well, just vanilla mortgages and home loans."

"In short, there is insufficient competition in the New Zealand financial services sector and we are keen to shake things up. New Zealand is a wonderful jurisdiction from which to conduct a global financial services business, but commercial opportunities also exist domestically, which we are keen to target," he said.

"We believe that our presence in New Zealand can be of benefit to the average New Zealand investor, and as a responsible corporate citizen, regulated in New Zealand, feel an obligation to make a contribution to the domestic market."

Asked where the financial backing for Kiwi Deposit might come from for such expansion, Williams said he didn't want to be specific about that.

"Maybe what I should do is come back to you on that topic."

Williams added that Kiwi Deposit became a member of Swift this year, and has "correspondent" banking relationships with a number of banks, both in New Zealand and overseas. The annual report notes bank borrowings of €7.6 million. Kiwi Deposit's application for certificate of incorporation lists 20 members, all companies with one providing a Singapore address and the rest the same Auckland address as Williams.

3) Safe and Sound: Rocked by 'earthquakes affecting the capital of the nation'

The Safe and Sound Building Society lists its registered office as Level 19, BDO Tower, 120 Albert Street, Auckland, and says it has an administration centre in Crestmead, Queensland. Directors include a Frederick Frtiz Mendl Stonnell of New Plymouth, who, according to Safe and Sound's website, has a long, proud and successful history of business innovation.

"Fritz and his brothers pioneered ready mix style concrete and slip form construction methods in New Plymouth in the 1950s. Fritz has been involved in several other successful ventures. Fritz supports New Plymouth Junior Chamber of Commerce and Probus club," the website says.

Its CEO is listed as the Australian-based Daniel J Murphy, a "certified developer of enterprise" who is completing a Graduate Certificate of Commerce. "Daniel has a broad range of experience in business management, credit control and debt collection. Daniel supports Bush Venture, a wilderness based therapy program for troubled youth," the website says.

The directors' report in Safe and Sound's 2011 annual report notes: "The Building Society has now been incorporated for just over three years. During this period we have endured the death of a director, a global financial crisis, a cyclone in the vicinity of one of our offices, widespread flooding in SEQ, earthquakes affecting the capital of the nation and significant regulatory reform."

"During this period many of our peers required government assistance to stay in business. We did not need, seek nor receive any external assistance. We have been able to advance the cause of the Society and, accordingly, we are now receiving the respect and cooperation of our peer banking institutions."

The annual report includes an audit report by Jason Croston, the audit partner at Australian firm SRJ Accountants giving Safe and Sound a clean bill of health. The annual report also shows a $13.654 annual loss, down from $21,253 in 2010 and a pledge from the directors that the next period will be profitable.

The annual report shows total assets of almost $19.5 million, including loans of $19 million, and liabilities of $17 million comprised entirely of deposits, giving net assets of $2.46 million. It doesn't say whether the figures are in the New Zealand dollar, Australian, or US.

'Call Dan Murphy in Australia'

Interest.co.nz phoned Stonnell, who said any questions about Safe and Sound Building Society were best directed to "Dan Murphy in Australia."

"Although I'm a director I have very little to do with the running of the company," Stonnell said. "He (Murphy) is the CEO and spokesperson."

Asked about his background with ready mix concrete, Stonnell said he and his brother started and built up a ready mix concrete business in New Plymouth.

"We designed and built our own ready mix plant. We were the seventh ready mix plant in New Zealand. The company was named Conroc. It was bought by Firth Industries (now a part of Fletcher Building) years ago," Stonnell said.

Asked how he had got involved with Safe and Sound, Stonnell said he was a "distant relative" of Murphy, who had asked him to become involved. Stonnell said he had no background in financial services, although he had been a director of the ready mix concrete business.

Interest.co.nz also phoned Murphy, after sending an email to Safe and Sound's email address asking several questions about its operations and which capital city it was referring to that had been affected by earthquakes.

"Yeah mate I got your email," Murphy said. "I'm just a bit busy at the moment. Just leave it with me for a day or so buddy."

Asked whether he had five minutes now Murphy said no, but said he would get back to interest.co.nz. He is yet to do so.

In its application for certificate of incorporation, Safe and Sound lists a mixture of 22 individuals and companies as members with all bar two, Lou Stonnell and Anna Stonnell of Hamilton, in Australia.

SBS boss 'concerned'

SBS Bank, the country's biggest building society, is crying foul over building societies being able to register in New Zealand and operate overseas and thereby largely escape regulation.

Ross Smith, chief executive of SBS Bank,which obtained bank registration from the Reserve Bank in October 2008 and has retained its mutual structure of being owned by members, told interest.co.nz SBS is "naturally" concerned about any activity, legal or otherwise, that could harm the reputation of the sector within New Zealand.

"It is concerning that these organisations can register in New Zealand to conduct business only in overseas markets and apparently escape the supervision of any regulator," Smith said.

"It seems somewhat ironic that the NZ Government is happy to impose significant compliance costs on local, legitimate financial service providers at a time when the activities of a few 'suspect' organisations could well tarnish the reputation of both the sector and the country as a whole."

RBNZ 'not in a position to monitor their transactions'

Asked about the New Zealand registered building societies operating overseas, a Reserve Bank spokeswoman said although originally captured by the Reserve Bank’s non-bank deposit taker regulatory regime, which specifically included building societies regardless of whether they accepted deposits from the New Zealand public, such entities have since been "deemed out" of the Reserve Bank's regime through regulations "because it was not intended that such institutions (i.e. those not taking deposits from the NZ public) be captured by this regime."

The Reserve Bank spokeswoman also pointed interest.co.nz to a page on the central bank's website entitled clarification on building societies. This states that: "The Bank does not comment on specific transactions entered into by financial institutions. In particular, note that the Bank is not in a position to monitor transactions undertaken by New Zealand registered building societies that operate in overseas markets. Building societies in this category include Kiwi Deposit Building Society and General Equity Building Society."

"New Zealand building societies are registered with the (MED's) Registrar of Building Societies, not with the Reserve Bank.  Registration as a building society is a process of establishing an entity’s corporate form and does not relate to prudential supervision or its financial soundness," the Reserve Bank adds.

All of General Equity Building Society, Kiwi Deposit Building Society and Safe and Sound are registered on the financial services providers register. Only one, General Equity, is a member of a dispute resolution scheme - Financial Services Complaints Ltd - which is a prerequisite if an entity offers financial services to New Zealand retail investors.

(Update adds ASIC certificate of disqualification for Anthony James Scott).