Ron Pol explores barriers and opportunities facing the Shewan ‘review’ of NZ foreign trusts

By Ron Pol*

‘Review’ may be a misnomer (as outlined below), but whatever its findings, it should be interesting to see how Shewan resolves the bugger’s muddle of a hot potato hospital pass he’s been handed.

Government’s ‘Shewan sidestep’ no impediment

Shewan has the expertise claimed, and then some, and his integrity is second to none. Nor, as far as I can tell, does he suffer the ‘ego-collosus’ of some of his peers, so I reckon he won’t much care that he was chosen after the Prime Minister said that an “international ‘independent’ expert” would be selected.

Even aside from the ‘international’ and ‘independent’ requirements, Shewan may have been surprised to receive the call, if like others he thought the ‘expert’ element would be in the ways that secrecy vehicles like NZ foreign trusts can be established and misused by unscrupulous actors for illegal purposes. Perhaps someone like Professor Jason Sharman, who with other top academics conducted the world’s leading research in this area and (literally) wrote the book, ‘Global Shell Games’. But the scope of the review was the government’s call. Not Shewan’s concern.

Shewan’s first hurdle: when a ‘review’ is not a review

Something that Shewan has had to grapple with, however, were his terms of reference. These enable him only to review our foreign trusts rules if he finds – in an area outside his expertise, on which the government has repeatedly said is not the case, and against the strong admonitions of the terms of reference itself – that existing disclosure rules are not sufficient to ensure the maintenance of New Zealand’s reputation. From the outset, the ‘safe’ option appeared destined to force an elegantly worded whitewash.

If he manages to get past this conundrum, Shewan may venture into areas in which he does have expertise, and may even be able to conduct a meaningful review.

Multiple conflict hurdles: disclosure will at least help

The tiered array of conflict hurdles Shewan must then overcome, or at least disclose, are daunting.

Shewan has long helped the government on matters of tax policy and legislation. It may be difficult (or may be perceived so) for someone effectively an insider to make independent findings contrary to existing policy settings, particularly in areas in which Shewan or his former firm, PwC, may have been actively involved. The difficulty would be particularly acute in relation to any such advice involving the operation of New Zealand’s foreign trusts regime itself. Shewan will presumably disclose any such issues, so that his report may properly be assessed in full knowledge of any such potential influences.

Mossack Fonseca also worked with more than 14,000 intermediaries in setting up corporate vehicles throughout the world, so it is reasonably likely that Shewan or PwC had dealings with them, whether in relation to the establishment or operation of NZ foreign trusts or other corporate and ownership vehicles of a similar nature in New Zealand or elsewhere. If so, this too may be disclosed.

More significantly, however, like many of the big legal and accounting firms, PwC itself will likely have been involved in setting up or administering NZ foreign trusts during Shewan’s career as a partner and chairman of PwC. Almost certainly, the firm will have advised many clients regarding a wide range of transactions and other circumstances involving NZ foreign trusts and similar corporate and ownership vehicles. If Shewan or his firm was actively involved in the foreign trusts industry, it may be difficult (or perceived so) to draw adverse findings regarding activities involving the firm and its clients’ interests.

Moreover, there is a body of research suggesting hidden risks. Even in the knowledge of potential misuse by those who ultimately own and control such vehicles, professionals may rationalise their own actions and behaviours establishing such vehicles within the confines of an overriding self-belief of propriety. Almost by definition, few of us have the insight to recognise our own subconscious biases. I acknowledge that I can offer little in this complex area, so return quickly to the comfort of firmer ground, and suggest only that if Shewan or PwC during his time as partner and chairman were associated with NZ foreign trusts or similar secrecy vehicles, the report might at least disclose any relevant facts accordingly.

Likewise, it is difficult in a brief article adequately to assess the impact, or even the relevance, if any, of international developments, but PwC itself has long been involved in establishing and advising in relation to what might be described opaque ownership and corporate structures which share characteristics associated with NZ foreign trusts.

In the UK, for example, parliamentarians have accused PwC of creating ‘extraordinary’ structures ‘to avoid tax’, of promoting tax avoidance on an ‘industrial scale’, and giving ‘misleading evidence’ (denied by the firm) about those activities. In a curious twist, before they released the ‘Panama Papers’ the International Consortium of Investigative Journalists was involved with the earlier ‘Lux Leaks’, in which former PwC employees and a French journalist helped expose what have been termed ‘dubious practices’ allegedly involving ‘industrial scale tax avoidance schemes’ within PwC’s sprawling Luxembourg office.

PwC Luxembourg and PwC UK are presumably separate, in legal terms, from PwC New Zealand. To suggest that this indicates comprehensive separation would, however, be disingenuous. The inconvenient truth is that they share a common brand, and may share some systems and practices. Nonetheless, whether these issues have relevance, or not, is at best problematic, not least because they involve complex and disputed issues. In any event, they are matters of public record, readily available for commentators to assess as appropriate, so it may not be necessary for the report to disclose them.

Credible only if findings contrary to government’s apparent intention?

If any of these various potential conflicts are material, it might be suggested that Shewan’s report can only be credible (or perceived as such) if it finds against the government’s ‘guidance’, as forcefully if not clumsily expressed in the terms of reference, parliament and media. Shewan, however, is no-one’s ‘yes man’. He may well make his own call, irrespective of any such ‘guidance’.

Political repositioning

Moreover politically the government appears now to have positioned itself as being open to the very change it had steadfastly resisted in relation to New Zealand’s foreign trusts regime. This repositioning has been notably more astute than the initial terms of reference, and largely unconstrained by opposition or media scrutiny. With the opposition distracted by seemingly ill-advised skirmishing on peripheral issues, the Prime Minister began claiming that the government was “open to making changes”, and the Police Minister canvassed a public register of beneficial ownership and control of companies. John Key continually repeated the new mantra that change would be made “if necessary”, and yesterday the Revenue Minister hinted at “stronger rules on the way”.

Of course, the review might just do some 'finger pointing' and leave the core issues unchanged. For example, the IRD might be faulted for not following up if as might be expected some of the limited reporting by foreign trusts wasn't done by all of NZ's foreign trusts. Along the lines, "the rules were there all along, but IRD didn't do their job". I'm no apologist for IRD, but that would be a bit rich. The legitimate users might file a basic return when required, and even some of the criminal users might do so (filling in a meaningless form ain't too difficult, and all the better to stay under the radar). But if the Sinaloa cartel used an NZ foreign trust in one of its complex ownership structures or transactions, and wrapped it up two days later, severing ties too with whatever legitimate service providers their cover service providers used along the way, they won't much care. And even if now like the rest of the world IRD actually knows his whereabouts, they're not about to call. "Dear Mr El Chapo, you seem to have forgotten to fill out our almost completely meaningless form so we could tick a pointless box." Nor will the lawyers know anything more. And when the cartel have another transaction, they'll establish another. Like, duh. That's what invisibility cloaks are for. Single use, discard. The criminal cash is what get's laundered, not the cloak. So if this is what happened, it's likely not so much the form collector as the policy settings that created the situation. Anyway, we shall see.

Either way, whether Shewan suggests substantive changes or just affords the ability for politicians of any party to indulge in finger pointing, the government appears deftly to have secured itself the best of both worlds, at least politically. With scant debate or consideration of the actual issues themselves, by government or opposition parties, the government now appears well positioned, politically, whatever the result of the review.

Interestingly, from terms of reference which aggressively restricted options, and circumstances resembling a can of worms tossed into a minefield for Shewan to retrieve, the government may now be perfectly relaxed with either the status quo thus far vigorously defended, or pretty much any change he may now care to suggest.

Can he do it?

With a few notable exceptions, the relative scarcity of informed or critical scrutiny of the core issues by opposition parties or much of the media appears to have enabled the government to reposition to a state where, ironically, even without troubling itself to address the core issues, it may be able to inflict more political damage by embracing the change it has long resisted than maintaining the status quo. The government’s political strategists may regard this a bridge too far, but either way, Shewan’s report should be interesting, on several levels.

From a political science perspective, the politics has been fascinating, but in terms of policy effectiveness and what may be best for New Zealand the real test will be – despite seemingly insurmountable barriers and conflicts, and a lack of meaningful debate on the core issues – whether the report itself actually seeks to address the substantive issues.

In short, our foreign trusts regime currently offers an invisibility cloak for foreigners to use New Zealand to hide their activities, whether for legal or criminal purposes. The solution is a simple one. We have complete control of the design of our criminal getaway car manufacturing industry, and we have already made adjustments to prevent Australians using New Zealand to evade taxes. Will Shewan suggest that we factory-fit criminal immobilisers across the board?

The odds appeared stacked against it. Proof of the adage that a week is a long time in politics, in little over a month the odds have shortened, and turned. But even if they hadn’t, Shewan might just be the man to face the core issues anyway. We shall see. And now, it seems, sooner than expected.

Disclosure: I interacted professionally with John Shewan when I managed litigation for the Telecom Group, mostly in relation to Telecom’s contingent liabilities (PwC was Telecom’s auditor). Professor Jason Sharman is currently my principal PhD supervisor. Neither was aware of this article before its publication. The opinions expressed are solely my own.

*Ron Pol is a crime prevention specialist with AMLassurance.com. A former lawyer in both NZ and the UK, and legal business consultant, Ron is completing a political science doctorate on policy effectiveness, crime prevention and money laundering.