Ron Pol concedes defeat and leaves parting gift of policy suggestions beyond the Shewan report

By Ron Pol*

I intend this to be my last substantive piece on this topic. When invited to inject some objectivity into the Panama Papers debate, I was happy to help, in some small way, but today concede defeat.

The government may yet follow some or all of John Shewan’s recommendations, but even if it does, the dominant discourse seems as distant from reality as three months ago when the Panama Papers story broke.

Nor is this a complaint.

Like ‘Brexit’, albeit on a much smaller scale, it might be argued that the debate here has been influenced more by misconceptions, half-truths and platitudes wrapped in sound-bites, devolving into some ‘Alice in Wonderland’ paroxysm of pointlessness (House antics), rather than genuine public debate focused on the core issues, guided by politicians offering thoughtful and considered leadership in the country’s best interests. Issues are sometimes addressed one way, or the other. That’s just the way democracy works.

For those who remain interested, I offer a few parting comments on policy options “beyond Shewan”. (If you’re short on time, skip to the conclusion).

Crime prevention

Last week, a journalist from one of the global media outlets told me she had “spoken to lots of lawyers and trust experts” but “what makes you different is focusing on the potential (or, more likely, reality) of the way in which [NZ’s foreign] trusts aid criminals”. That made me think.

Having attempted to address at least some of a legion of half-truths, and why criminal use of NZ foreign trusts harms all of us (10 Panama Papers myths busted and Is NZ sweeping reputation time bomb under the carpet?), what else might be added to a policy effectiveness checklist, if New Zealand does eventually choose to close down the section of its secrecy vehicle manufacturing plant that churns out vehicles perfectly designed as criminal getaway cars?

With the odds stacked against him (Has NZ’s reputation been damaged enough?), Shewan boldly traversed tax, trusts, anti-money laundering and political science disciplines. In essence, the report recommends much the same core message outlined here back in April, of retaining New Zealand’s foreign trusts regime whilst closing out illicit use with meaningful disclosure and a register accessible by authorities (Forget the tax haven semantics and focus on real issues).

A few quibbles aside, on the substantive issues the Shewan report nailed the core issue, usefully adding turbo-chargers and some fine detailing. And on the political front, I’m on record describing his report as a “nuclear option” (Objective analysis cuts through sea of BS). So, what could we possibly add?

Taking a cue from the journalist’s observation, it might be useful to reframe the question. From a broader crime prevention perspective, then, what’s missing or might be added to Shewan’s recommendations?

First, we should identify the objective

It is axiomatic that for any policy initiative to be effective, it must squarely address the ultimate policy objective. Shewan’s expertise is tax and his objective was New Zealand’s reputation. So, if serious crime prevention is our goal, that’s where any additional policy suggestions should focus.

Second, isolate the issue

New Zealand’s foreign trusts regime doesn’t discriminate between legitimate and criminal use. That means that what makes them and other opaque vehicles attractive to legitimate users, secrecy, is an equally attractive benefit for despots, tax evaders, drugs and arms traffickers, and their attendant money launderers. New Zealand’s foreign trusts regime therefore inadvertently offers criminal getaway cars, with a free invisibility cloak, for pretty much anyone who wants them.

Third, what’s the test for effectiveness?

With the issues clearly expressed, the solution is obvious. Cut out the bit that enables and facilitates serious crime. The solution itself is hardly rocket science. Any politician can also slap on some new rules and proclaim success. The hard thinking involves crafting a solution that actually works. It was heartening to see that Shewan also looked beyond mere rules, towards their effectiveness in achieving certain objectives. So, are the suggested new rules effective, in terms of achieving the policy objective of crime prevention?

To identify what might actually work, and isolate policy initiatives to plug any gaps, requires a means for assessing effectiveness. Shortly before the public release of some of the material in the Panama Papers, I suggested a 4-part test for assessing effectiveness, if  - as President Obama did so even without Congressional support (Panama Papers: Is NZ sweeping a reputation time-bomb under the carpet?) – the government chose to address the issues on its own terms (John Key faces stark and simple policy choice raised by the Panama Papers).

The 4-part test would benefit from robust debate, refinement, and perhaps even a complete rewrite, but remains useful, I hope, at least for an initial rough assessment.

The government didn’t take the opportunity then to implement changes on its own initiative, but we now have the Shewan recommendations as a proxy against which to assess elements of crime prevention effectiveness. Adopting for analysis purposes an assumption that the government will accept all of its recommendations, we can apply the 4-part test to the Shewan report.

Test 1: Will the proposal stop any criminal misuse of New Zealand’s offshore trusts regime?

The test is one of effectiveness, not merely the existence of rules. As an illustrative example, when last I checked, the UK’s new requirements for the public disclosure of beneficial ownership and control of companies applies easily circumvented thresholds and excludes trusts, thus allowing any criminal misuse to continue largely unimpeded. Policy initiatives that fail to calibrate for policy effectiveness may have limited impact in terms of crime prevention whilst imposing unnecessary costs on the vast majority of legitimate users, particularly if the only real impact is to put criminals to the inconvenience of reordering their affairs to continue their activities largely unimpeded.

In New Zealand, although the terms of reference and even his selection seemed curious, my hope that “Shewan might just be the man to face the core issues anyway” proved right. If implemented, the multi-faceted recommendations of the Shewan inquiry outline the makings of a fit-for-purpose factory-fitted criminal immobiliser.

These include:

• A register of NZ foreign trusts accessible by regulatory agencies, including more extensive disclosure requirements with more meaningful information about those who ultimately control and benefit from NZ foreign trusts, a process for notifying changes, and including foreign trusts within New Zealand’s international automatic exchange of information standards.
• Transitional rules bringing existing NZ foreign trusts into line, and early removal of the exemption from anti-money laundering obligations for lawyers and accountants servicing them.
• Strengthening requirements to verify the underlying source of funds settled into NZ foreign trusts, better guidelines about doing so with complex structures, and extending reporting obligations to cover transactions not passing through NZ banks.

From a crime prevention perspective, some elements not as effective as they may seem

I haven’t included the seemingly powerful sanction that Shewan recommended, that NZ foreign trusts’ exemption from income tax should apply only to foreign trusts that register with authorities and fulfil the disclosure requirements. This illustrates differences between a ‘tax’ and a ‘crime prevention’ perspective.

Tax-free status may be an important factor for legitimate users. With such a sanction, they may be expected more assiduously to comply with disclosure requirements. But secrecy, not tax, is the primary driver for criminal use. Sure, criminals like to avoid tax too, but NZ foreign trusts are versatile vehicles. If the invisibility cloak remains available, and NZ foreign trusts can be structured not to hold income generating assets in any event, organised crime groups may get the best of both worlds. For criminal users of NZ foreign trusts, therefore, the apparent sanction of stripping tax-free status may be ineffective.

Nor have I included the recommendation to review the rules for sharing information between domestic regulatory and enforcement agencies. Any such rules might be effective, or not, but remain largely meaningless (in terms of effectiveness) until actually proposed, and implemented.

Reasonable crime prevention effectiveness overall

A great many other initiatives could help advance crime prevention effectiveness. For example:

• reducing the unnecessary complexity of the primary anti-money laundering offence (which deters well-founded prosecutions);
• removing unnecessary barriers in relation to proof of overseas ‘predicate’ crimes (which offers a competitive advantage to foreign-based criminals over their domestic counterparts); and
• considering unexplained wealth laws (the absence of which favours successful money launderers over their less savvy colleagues significantly more likely to be prosecuted under current policy settings).

These and other policy effectiveness enhancements, whilst beneficial in the context of foreign trusts, being of more general application are perhaps best considered elsewhere.

In relation then to crime prevention specifically regarding NZ foreign trusts, and the Shewan recommendations in particular, no system is perfect, and I can envisage several ways that someone sufficiently well-resourced, determined, and using the right advisers, might circumvent the proposed system, especially if the recommendations are implemented on the usual rules-based approach to legislative drafting. (Ironically, a ‘clean’ secrecy haven is more attractive to sophisticated criminal groups, so, particularly if any additional rules are crafted in the usual way without benefit of the new form of effectiveness testing, a few criminal groups might be expected to use the methods I have already envisaged to try and skirt them).

Overall, however, the Shewan recommendations offer a reasonable framework for helping make NZ foreign trusts sufficiently unattractive, as likely to deter a significant proportion of those who may want to use their secrecy feature for criminal purposes.

By any measure, the Shewan report offers a vast improvement from the ‘wild west’ free-for-all of the existing regime, which facilitates and enables the use of NZ foreign trusts for legitimate and criminal use indiscriminately.

Gaps remain

Although the latter two may be outside the relatively narrow scope of the Shewan inquiry, from a broader crime prevention perspective there remain some big gaps. For example:

• Automatic exchange. Currently, ‘on request’ disclosure is virtually meaningless (as here, item 5), and helps facilitate the secrecy necessary for criminal misuse when other countries have no idea New Zealand might be harbouring their criminals. The problem is clear, but the issue is vexed. There may be some occasions where exchange with despotic regimes may expose citizens hiding funds legitimately. On the other hand, corrupt officials secreting billions in stolen funds would also make such claims. An effective means of automatic information exchange, preserving legitimate interests, is necessary. We have no issue doing so to deter tax cheats. Nor should NZ foreign trusts provide cover for grand corruption or organised crime groups.
   
• Opaque companies. New Zealand’s companies’ registration regime has long been rated poorly by the OECD and other international monitors. A register that doesn’t require beneficial ownership details allows whoever owns and controls companies to hide behind nominee directors and corporate shareholders.  Moreover, new rules requiring resident directors are the epitome of ineffectiveness.  In the most celebrated case involving serious crime in which there was a resident director even before the rule change (a young fast-food worker, convicted and discharged), the organised crime or terrorist group that used a New Zealand company to shield their international arms trafficking business has never been found. New Zealand recently “committed to exploring” the possibility of establishing a public register listing company beneficial ownership details, but in the meantime ordinary companies continue to offer opaque-ownership and opaque-control vehicles enabling criminal misuse.
   
• Hidden transactions. The Shewan inquiry was told to focus on disclosure rules, but foreign trusts even with known beneficiaries and legitimate funds may be used as secrecy vehicles for criminal purposes. New Zealand could therefore consider installing a form of security camera, enabling authorities to monitor some key transactions as well as ownership. First suggested here, a beneficial ownership and activities register does, however, create a range of other issues, and may not be feasible, but secrecy vehicles like NZ foreign trusts can facilitate crime even when the trust itself appears legitimate. This reflects the reality that the NZ foreign trust’s role may be simply to cast an invisibility cloak over one link in a wider secrecy web hiding criminal assets and transactions conducted further along the chain, or drivers may be swapped out and the vehicle used, dumped and wiped clean (or some patsy left holding the keys). Disclosure is one thing, but the use to which secrecy vehicles are put is another.

Test 2: If it stops criminal misuse, will it be effective immediately?

A recent example is a US Treasury crackdown, which required beneficial ownership data on real estate sales in New York and Miami. It was announced months in advance, and restricted to specified transactions, geographic locations and thresholds, enabling all but the dumbest criminals to evade detection.

In relation to the Shewan inquiry, initial indications suggest that, if all recommendations are implemented (particularly those exposing beneficial ownership and control, and visibility by regulatory agencies), it should have an immediate chilling effect on the attractiveness of NZ foreign trusts for criminal use.

Test 3: Will it lock in criminal assets to prevent and reduce flight, effectively enabling existing criminal misuse to be uncovered, prosecuted and criminal proceeds seized and forfeited?

If as a nation we are truly serious about crime prevention in relation to New Zealand’s version of secrecy vehicle, we could also lift the bonnet. Although it presents significant legal and practical challenges, as well as preventing future criminal use of NZ foreign trusts we could also seek to uncover existing misuse. We may find relatively little, or we may expose serious ongoing and past criminal activity facilitated by NZ foreign trusts. Either way, in addition to benefits detecting and prosecuting serious crime, the disinfectant of sunlight would enhance New Zealand’s reputation and add authenticity to any new ‘clean’ model of secrecy jurisdiction.

As noted above, the potential for criminal use, and its solution (severing the part enabling and facilitating serious crime) has long been obvious. To best meet test 3, a solution should have been applied before the issue became publicly known. It wasn’t. A solution implemented soon after the issue became publicly known might also have been relatively effective under this test, potentially catching some criminals not quick enough to adjust their arrangements. It wasn’t.

Instead, if criminal users of NZ foreign trusts are like horses in a barn represented by New Zealand’s foreign trusts regime, the effect of many months of noisy public debate and inquiry may have been to hold the barn door open and generate so much noise as to spook even the slowest horse to do what they are reputed for in such circumstances. There must be considerable doubt whether this test might be met.

Test 4: Will New Zealand share information multi-jurisdictionally to enable effective seizure and forfeiture (and if we’re smart, share any proceeds)? 

This final test reflects the fact that in relation to NZ foreign trusts, criminal assets will not be held ‘in’ New Zealand, because this form of secrecy vehicle is, in effect, designed more like a criminal getaway car than a bank for criminal proceeds. As well as their legitimate uses, NZ foreign trusts are perfectly suited as part of the secrecy and ownership web enabling criminals to hide assets and profits wherever in the world they actually want to invest, outside New Zealand.

If the New Zealand government or its enforcement agencies is considering whether to go after criminal proceeds at a global scale, we don’t even need to muster the intestinal fortitude to be the first to seek actionable evidence to seize criminal funds. The Canadian Revenue Authority went to court to force the country’s largest bank to hand over decades of records to reveal evidence of the use of offshore accounts and shell companies to evade taxes. Israel’s tax chief has upset some company incorporators, but has apparently exposed criminality to such an extent that the prime minister and minister of finance are reportedly considering the possibility of tax cuts funded by the wholesale recovery of criminal proceeds. This suggests an order of magnitude beyond seizing local drug dealers’ tinnie houses.

And if FIFA is any indication of the dogged determination of America’s bevy of three-letter acronym enforcement agencies – even when others steadfastly covered their investigative eyes – working with the FBI, IRS and DOJ might prove better for New Zealand’s interests than brushing it under the carpet in the hope that organised crime groups were too stupid or too poorly-advised to notice a perfectly designed invisibility cloak available for anyone who wanted to shield their activities, and that no overseas investigations may uncover NZ foreign trusts shielding say the British Virgin Islands and Delaware fronts of serious organised crime or terrorist groups. (Is NZ sweeping a reputation time-bomb under the carpet?). If we can help our international counterparts strip the invisibility cloak from any NZ foreign trusts as a key to unlocking other criminal secrecy vehicles that may hold swathes of Manhattan real estate, for example, New Zealand might even be able cut a deal to share some of the proceeds.

Monitoring effectiveness

Finally, if we want an effective measure of effectiveness itself, replacing evidence-free argument with evidence-based objectivity also requires a rigorous evaluation methodology.

This might, for example, include some measures of the extent to which the growth of NZ foreign trusts drops away. If numbers keep rising, this may suggest that there wasn't much misuse to begin with, or that a drop off in criminal misuse was offset to a lesser or greater extent by a new ‘clean’ model of secrecy vehicle attracting legitimate users sick of being tarred with the same brush as criminals. With multiple variables to consider it's more complicated than this simple example, but the only way properly to assess effectiveness requires a robust, scientifically sound, evaluation methodology.

New Zealand: Crime enabler, or global crime prevention leader?

If I were Prime Minister, I know which side I’d rather be on. Going it alone and relying on a strategy of hope that organised crime groups haven’t used any of thousands of Kiwi secrecy vehicles perfectly designed for enabling and facilitating crime? Or joining with our international partners proactively to detect, prosecute and prevent serious crime, at a global level, with success potentially enabling broad tax cuts funded by criminals? Good thing I’m not Prime Minister. It seemed a simple enough choice back in April (here), but apparently not. In any event, having held the barn door open several months, the horses may well have bolted, but the Shewan report offers ‘NZ Inc’ a second chance to make a similar choice.

Acknowledgements. I tip my hat to Gareth Vaughan, Terry Baucher, Deborah Russell, Michael Littlewood, Craig Elliffe, Gareth Morgan and John Shewan, and to contributors here and elsewhere, actively engaged in robust debate beyond the noise of misconceptions and half-truths. 

*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.