Ron Pol cheers John Shewan's report on foreign trust disclosure, says with him exercising the nuclear option the government's choices are now stark

By Ron Pol*

It would be tempting to say you saw it here first. Over two and a half months, the Shewan inquiry into foreign trust rules distilled six main choices (here, at 10.9) into four options applicable when assertions that foreign trusts are “being used extensively [to] facilitate tax evasion, aggressive tax planning [and] money laundering and hiding of assets” were found to be justified (here, at “high level overview”). 

I might claim that the preferred option was much as I had first outlined on Interest.co.nz, way back on 11 April, coincidentally the same day the inquiry was announced. Even that article’s title, “Forget the tax haven semantics and focus on the real issues” was a chilling premonition of Shewan’s conclusion that debates focused on the ‘tax haven’ tag “tend to be futile in throwing light on the core issues or resolving them."

In essence, the Shewan report recommends retaining New Zealand’s foreign trusts regime, but closing out illicit use with meaningful disclosure and a register accessible by authorities. 

To get there, however, John Shewan surmounted the formidable hurdles of his terms of reference, which more recently I described somewhat inelegantly as a “bugger’s muddle of a hot potato hospital pass”. Although I concluded that Shewan “might just be the man to face the core issues anyway”, I must be scrupulously honest, even after the event. I didn’t think, nor dared to hope, that he might go quite so far. 

I have some quibbles about some elements of his report, but it would be difficult to find a better lesson in the art of objective analysis cutting through a sea of bullshit. 

Some experts may have baulked when asked to opine beyond their expertise, as a tax expert ruminating on rules sufficient to maintain the reputation of a country. Bizarrely, the initial expression of his terms of reference seemingly precluded Shewan even considering and advising on options unless he found the rules insufficient to maintain New Zealand’s reputation. 

Others may have taken to heart the government’s unsubtle hints about the OECD giving New Zealand its “highest possible rating” and assertions of “detailed financial and other records” claimed already to be required by our rules. 

Even appointing a tax expert was curious, with the government selection process seemingly captive to one of many misconceptions that the report later dispatched, with much of the media and most politicians at the time distracted by notions that the Panama Papers and NZ foreign trusts were mostly about tax evasion. The Prime Minister had vowed to appoint an “international independent expert”, which suggested instead someone like Professor Jason Sharman, the author of ‘Global Shell Games’ and a world-leading expert in the ways that secrecy vehicles like NZ foreign trusts can be established and misused by unscrupulous actors for illegal purposes. 

As I had perhaps unkindly expressed, Mr Shewan also faced a daunting, tiered array of potential conflicts of interest. 

In the face of these formidable barriers, and keeping a weather eye on the future prospect of continuing a long career advising the government on tax issues, the ‘safe’ option might have been a long and elegantly worded whitewash. Or, for the bulk of the report to delicately navigate through the barriers. Instead, Shewan simply ignored the lot, and got on with the job at hand. 

New Zealand’s foreign trust disclosure rules were bluntly declared “inadequate” and “not fit for purpose”. Dealing with the assertion of “illicit funds being hidden in New Zealand foreign trusts”, it was frankly accepted as “reasonable to conclude that there are [such] cases”. It is indeed likely that “the [foreign trusts] regime is facilitating the hiding of funds or evasion of tax”. 

Arguably having stepped beyond his expertise even to offer such opinions, Shewan strode onwards, venturing unperturbed into the esoteric areas of anti-money laundering regulations and practice, and into the political science arena of policy effectiveness. 

For over a month, I had seemed alone in my own small craft on a vast sea of powerfully co-ordinated rhetoric proclaiming some magical fix, until the Shewan report also laid waste to the red herring that extending anti-money laundering controls to lawyers would somehow address the dark side of New Zealand’s foreign trust regime which operated as a criminal getaway car manufacturing plant. 

“In theory”, says Shewan, the “anti-money laundering rules should ensure that funds held by foreign trusts are from legitimate sources”. But then there’s reality. “Under current law and enforcement practices the risk of detection by authorities is low”. Combined with a slew of new registration and disclosure requirements, Shewan also recommended changes to anti-money regulations and practice. Having disregarded serried ranks of barriers, Shewan ignored also the seemingly proffered array of blandishments. Ducking few issues and declining to paint a rosy picture, his report might accurately be described as hard hitting. To say the least. 

In doing so, Shewan has handed the conundrum back to the politicians. In spades. The government elected not to make a choice earlier, to close down the obvious dark side of New Zealand’s foreign trusts regime on its own terms before the International Consortium of Investigative Journalists released some of the data from the Panama Papers. Notwithstanding its interim reaction yesterday to apply considerable ‘spin’ to the report, the government now has another opportunity to make a choice. 

With Shewan having exercised the nuclear option, however, the government’s options now seem rather more stark than before.

Scorched earth is all that remains of the myths, half-truths and blandishments behind which, until yesterday, any number of mealy mouthed options might have been found. Soothing sounds bereft of substance will now echo more loudly. 

Having long suggested a more nuanced approach than suggested by either the government or Labour – of retaining our foreign trusts regime, but closing out illicit use with meaningful disclosure and a register accessible by authorities – from a policy effectiveness and crime prevention perspective, naturally, I favour the government simply accepting and adopting Shewan’s recommendations. 

Done well, notwithstanding Shewan’s predicted contraction of the foreign trusts industry, it might even be possible for ‘NZ Inc’ eventually to gain competitive advantage with a new ‘clean’ version of foreign trusts. As suggested here earlier, the ‘made in New Zealand’ badge could become a world-recognised reputational quality mark for (legitimate) offshore trusts and companies crafted by professionals in what could become a world-leading hub for facilitating confidential (legitimate) dealings.  

An alternative choice is to meet fire with fire. If the government remains steadfast, the ‘Erebus option’ offers precedent for dealing with a particularly robust inquiry. But that didn’t end so well, for anyone. So, it’s hard to imagine anything less than orderly transition towards effective implementation. But clearly I still have much to learn about political science. Why the government has so staunchly defended the status quo, in the face – or so it seemed to me at the time, and now Shewan – of clear and obvious risks, readily soluble, has long escaped me. Likewise, I have no idea why the government might now want to maintain the dark side of New Zealand’s foreign trusts regime. So, surely, the bit that enables and facilitates serious crime will be 'gone by lunchtime'. Maybe.

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*Formerly a lawyer in New Zealand and the UK, Ron Pol is a crime prevention and money laundering specialist with AMLassurance.com. He is completing a political science doctorate on money laundering, crime prevention and policy effectiveness, with particular emphasis on more effective ways to cut the money laundering risks of lawyers, accountants and real estate agents.