Foreign trust review says disclosure rules 'inadequate,' allow illegal activity

With special feature audio: John Shewan on NBR Radio.

New Zealand's foreign trust disclosure rules are inadequate and probably allow illegal activities to go undetected, says a government inquiry by former PwC chairman John Shewan that recommends a significant increase in disclosure and a register of trusts.

The government appointed Mr Shewan to the inquiry after some 11.5 million documents were leaked from Panamanian law firm Mossack Fonseca related to foreign trusts including many that referred to New Zealand. Such trusts were used by criminals and terrorists to channel illegal funds and avoid tax, according to an international group of investigative journalists who have had access to the papers.

Mr Shewan's report, released today, says there is no direct evidence of illicit funds being hidden in New Zealand foreign trusts or of tax abuse. But the inquiry "considers it is reasonable to conclude that there are cases where foreign trusts are being used in this way."

"The current legislation, regulations, and practice that govern disclosures by foreign trusts present both the potential and the environment for this to occur," the report says. Although existing tax disclosure and exchange of information arrangement should be sufficient to deter tax abuse, and anti-money laundering rules should ensure funds held by foreign trusts are from legitimate sources, "under current law and enforcement practices, the risk of detection is low."

"The inquiry considers the disclosure requirements can be justifiably described as light-handed," it said.

Mr Shewan concludes the media has played a part in portraying New Zealand as a tax haven. "Allegations reported in the media include tax evasion, financing corruption, money laundering, sanctions violation and hiding of assets," he says in the report. These couldn't be verified, he said.

Finance Minister Bill English said Mr Shewan's recommendations "look sensible and well-reasoned."

"The government will look to implement the recommendations after officials have examined the inquiry in detail and reported back to ministers," English said in a statement. "A formal response to the inquiry will therefore be issued in the coming weeks."

Among the recommendations are that foreign trusts be required to register on being established, with the register of foreign trusts searchable by regulatory agencies but not the public. Information that would be required includes the name, email address, foreign residential address, country of residence and tax number of those connected with the trust including the settlor, protector, non-resident trustees, any persons with control of the trust beneficiaries and underlying beneficiaries.

For discretionary trusts, any class of beneficiary not listed in the trust deed would be required to be listed on the registration form.

Foreign trusts would be required to file an annual return with Inland Revenue including its annual financial statements, amounts of any distributions paid and details of the recipients. The new rules would apply from April 1, 2017, with existing foreign trusts required to register under a transitional rule.

"Actions to increase disclosure requirements would be consistent with New Zealand's commitment to global transparency initiatives, and can be expected to be well regarded by other countries, particularly those in our tax treaty network," Mr Shewan's report says. The recommendations "are designed to achieve a balance between allowing foreign trusts to continue in New Zealand and materially reducing the scope for foreign trust structures being used for illicit purposes such as hiding illegal funds or evading tax."

It recommends that foreign trusts be required to pay a registration and annual filing fee to recover the Crown's administration costs at a rate of $500 a time.

It also recommends that anti-money laundering (AML) rules be amended by Order-in-Council to ensure lawyers and accountants providing services to such trusts aren't excluded and that AML legislation or regulations be revised to include "a mandatory requirement to verify in all cases the underlying source of funds or wealth settled on a foreign trust."

It also proposes that legislation or regulations that govern suspicious transaction reporting to the Financial Intelligence Unit of the New Zealand Police be revised "to facilitate the reporting of actual or proposed transactions that have not or will not necessarily go through a New Zealand bank."

The report concedes that if adopted, the changes may result in a reduction in the number of foreign trusts, "in particular those that rely on nondisclosure to achieve their effectiveness."

The report says foreign trusts, like domestic trusts, are not in themselves immoral or illegitimate. They are typically legitimate vehicles "used primarily to manage family wealth."

"New Zealand is an attractive location in which to base a foreign trust as it offers stable political, judicial and legislative settings and respect for property rights and privacy," the report says. "The supporting services industry is significant and generally comprises skilled and efficient professionals"; and allowing foreign trusts to establish in New Zealand "is consistent with the government's policy of maintaining an open economy that welcomes foreign investment and an active financial services sector."

RAW DATA: John Shewan’s report is here


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