Greens, Labour call on Government to tighten loopholes that allowed Panama's Mossack Fonseca to set up overseas trusts in NZ to hide assets owned by controversial Mexican, Maltese figures

By Bernard Hickey

The Government has rejected calls to tighten up disclosure rules on tax-free foreign trusts that allowed Panamanian law firm Mossack Fonseca to create trusts here to hide the assets of controversial Mexican and Maltese figures.

Opposition parties and tax experts said the rules have opened up a loophole for the likes of Mossack Fonseca to promote New Zealand as a premier destination for 'asset protection', alongside the likes of Belize, Mauritius and the British Virgin Islands.

Prime Minister John Key said New Zealand's trust regime did not represent a tax haven and he rejected calls for a tightening of the regime around overseas trusts.

"Tax havens are where there is non-disclosure of information. New Zealand has full disclosure of information," Key told a post-cabinet news conference.

Tax experts rejected the suggestion that these trusts involved full disclosure. They disclose the names of the trusts and the trustees, but details about the trusts beneficiaries, the nature of assets and source of assets are not disclosed and the IRD does not focus on gathering information, given they are set up for foreign citizens and therefore are not liable for tax in New Zealand.

Key said the OECD had looked at New Zealand's tax arrangements in 2013 and given it a "clean bill of health." He said the offshore trust industry generated around NZ$24 million a year in revenues for New Zealanders.

Up there with Belize

Over 10,000 shell companies have been created under New Zealand's Foreign Trust laws, which do not require the public disclosure of the trusts' accounts for tax or other reasons. In combination with New Zealand's Financial Services Provider Register (FSPR), the trust regime has put New Zealand among a select group of jurisdictions -- alongside the British Virgins Islands and Belize -- as a discreet place for former dictators and well-connected business people to safely store their assets or to use New Zealand's good reputation as a selling point to convince investors to hand over their money.

Back in 2011 then-Commerce Minister Simon Power disclosed over a four year period 143 NZ registered companies have been implicated in criminal activities overseas such as smuggling, money laundering and tax fraud with NZ Police and the Customs Service receiving 134 enquiries about them. There has even been a book written about NZ entitled 'The land without a banking law; How to start a bank with a thousand dollars.' 

See Gareth Vaughan's opinion piece from October 2015 that asked if New Zealand had become a paradise for money launderers.

The issue burst back into prominence today with the leak overnight of 11.5 million documents from Mossack Fonseca that exposed the financial arrangements of dictators and others ranging from the King of Saudi Arabia to Vladimir Putin. The documents are collectively known as the 'Panama Papers' and were leaked to Germany's Suddeutsche Zeitung and the International Consortium of Investigative Journalists (ICIJ). See more details here at ICIJ.

The documents include this one showing how Mossack Fonseca proposed creating three New Zealand trusts to protect more than US$100 million worth of assets owned by Mexican tycoon Juan Armando Hinojosa Cantu, who is closely connected to Mexico's President Enrique Pena Nieto and has been accused of getting and giving sweetheart deals to Mexican politicians and their families. See more detail in this McClatchey DC report.

'Caribbean trusts replaced with NZ ones'

The creation of the trusts was proposed in the immediate aftermath of publicity around the tycoon's building of an opulent mansion for the President's wife. The document addressed to Mossack Fonseca's Miami agent and titled 'stated reason for creating three trusts in New Zealand', cites a plan to move assets from six trusts in the tax havens of British Virgin Islands and Nevis to the three New Zealand trusts, which would be the beneficiaries of a Dutch foundation and receive funds from accounts with around US$100 million at JP Morgan, UBS, Deutsche Bank and Morgan Stanley.

New Zealand's foreign trust sector has had a high profile in recent weeks in a political controversy involving Malta's Government, and also involving Mossack Fonseca. As reported in this Australian Financial Review piece describing New Zealand as a 'quiet tax haven achiever', New Zealand was the vehicle to set up the Rotorua and Haast Trust for two Maltese politicians through Orion Trust (New Zealand) Ltd, which has Giselle Fonseca as one of the directors, along with Auckland man Roger Thompson, a director at Bentleys Chartered Accountants Ltd and a former manager at Equiticorp.

See more here in Gareth Vaughan's piece today on Thompson declining to comment.

Malta's Energy Minister Konrad Mizzi defended his use of the trust as a vehicle for "long-term family asset management and inheritance."

He went on to say: "The trust is regulated and registered in New Zealand, a stable parliamentary democracy that is one of the world's most well-governed nations, having ranked in the top tier of indexes on the strength of its democratic institutions, government transparency and lack of corruption."

Mossack Fonseca gave New Zealand the same four star rating as it gave to Belize and the Seychelles in its page comparing jurisdictions.

Why no change?

IRD has been considering the tax rules around foreign trusts as part of its work with other Governments in the OECD's Base Erosion and Profit Shifting (BEPS) programme designed to crack down on tax evasion.

IRD said in an email to blogger Richard Smith on March 24 that IRD had given advice to the Government on foreign trusts in late 2014, but that: "In relation to the foreign trust tax rules, given wider Government priorities, the Government will not be considering regulatory reform of the rules at this stage."

The question for the Government is what reforms were proposed in late 2014, and why did it choose not to reform those rules.

Interestingly, the IRD official noted in the response to Smith that: "However, the Government has an ongoing responsibility to consider whether its regulatory settings are facilitating inappropriate behaviour in other jurisdictions.  It is possible that, in the future, this responsibility may require a review of the regulatory requirements applying to different types of investment or business vehicles available under New Zealand law."

Also, the IRD advised the Government in August 2013 (page 15) to review the tax treatment of foreign trusts and warned of the risks to New Zealand's reputation.

"Our foreign trust rules continue to attract criticism, including claims that New Zealand is now a tax haven in respect of trusts," the IRD wrote.

"This is largely because the mismatch between our rules and those of other countries may result in income not being taxed either in New Zealand or offshore. To protect our international reputation, it may be necessary to strengthen our regulatory framework for disclosure and record-keeping," it said then.

"This would result in increased administration costs for Inland Revenue and divert compliance resources away from the general business of collecting New Zealand tax. This, in turn, raises the question of whether our foreign trust rules are sustainable. We will report to you on this matter, including whether keeping the existing tax treatment of foreign trusts is sustainable in the long term."

Greens and Labour want reform

Meanwhile, the Green and Labour parties called on the Government to stop foreign trusts operating secretly in New Zealand in a way that allows New Zealand to become a tax haven for criminals, and that could expose New Zealand to allegations of hypocrisy, given its commitment to the OECD BEPS programme.

“Up until now, the National Government has been happy to allow New Zealand to become a significant tax haven,” said Green Finance Spokeswoman Julie-Anne Genter.

“New Zealand's foreign trusts form part of a trillion dollar tax haven industry highlighted by a document leak from Panamanian law firm Mossack Fonseca. It’s time to break open our foreign trust industry to help fight global tax evasion," she said.

“Our foreign trust laws are unsustainable. IRD has suspected this for years, and now needs to be empowered with simple, new transparency and record-keeping rules to keep the foreign trust industry here honest. How can we as a country work collaboratively with other countries to try and clamp down on tax avoidance by multinational companies while knowingly facilitating tax avoidance through our lax foreign trust laws?"

The Green Party would move to require foreign trusts in New Zealand to register and disclose more complete information on the identity of the settlors, their country of residence, related parties, and require annual financial reporting, she said, adding this would enable real-time information sharing with those 40 countries New Zealand currently has double tax agreements with.

Andrew Little called on Prime Minister John Key to say what was being done about New Zealand becoming a haven for hiding fortunes in secret trust accounts.

“New Zealand’s reputation is at risk from the reports emerging from the so-called Panama Papers.  International media stories today directly mention John Key and his discussions with the Malta Prime Minister at the Commonwealth Heads of Government Meeting in November 2015," Little said.

“The question for John Key is how long he has been aware that New Zealand is becoming a favourite investment location for foreign companies looking to keep their profits tax-free, and what has he done about it. The Prime Minister must address claims he has fought to retain the loophole whereby foreign trusts that hold offshore property and earn offshore income have no tax obligations in New Zealand and don’t have to file an annual income tax return here," he said.

“John Key must also reveal whether any of his Ministers currently utilise any of these foreign trusts. The Prime Minister must take urgent action to close this loophole to protect the integrity of New Zealand’s tax system and our international reputation for honesty and transparency."

New Zealand First Leader Winston Peters said Key was fostering a 'banana republic approach' by maintaining the tax-free trusts.

“Dirty money is being washed through New Zealand to evade tax and hide other serious financial and taxation manipulation,” Peters said.

“While Mr Key talks of being the Switzerland of the Pacific, what he and his colleagues have constructed is a reputation that tracks unscrupulous money dealings and straight out tax evasion. This will do nothing for our international reputation," he said.

“It’s harmful to genuine Kiwi companies and any foreign company that wants to invest here. Mr Key’s government has deliberately allowed the secrecy of trusts and our loose anti-money laundering laws to be untouched – yet New Zealand’s financial wizards have consistently warned they are doing us harm."

(Updated with reaction from Key, Peters)