The foreign trusts debate refuses to die as an international fraud-buster gets New Zealand in her sights.
The Report has a large audience with 300,000 Facebook followers and a “couple [of] million” hits a year, according to an article in Time magazine in January headed: “The Accidental Whistle-Blower: How a Retired London Journalist Uncovered Massive Corruption Half a World Away”.
The accidental whistleblower is Clare Rewcastle Brown, a 57-year-old British journalist who happens to be the sister-in-law of former Prime Minister Gordon Brown. She was born in Sarawak, north Borneo, and her interest in massive deforestation there led her to investigate what she alleged was the misappropriation of state funds under its governor, Abdul Taib Mahmud.
The Report shot to international prominence after she stumbled onto the money-laundering scandal that has engulfed Malaysia and its 1Malaysia Development Berhad (1MDB) sovereign fund, and which threatens to bring down the Prime Minister, Najib Razak.
It also led to the US Department of Justice last year confiscating through civil court action more than $US1 billion of assets it alleges was siphoned illegally from 1MDB (from a total $US3.5 billion it says was laundered through the US, including $100 million used to finance The Wolf of Wall Street).
The sequestration included assets owned by New Zealand-based trusts. The scandal rippled through to the High Court at Auckland in mid-January when relatives of Jho Low, a Malaysian financier at the centre of the allegations of misappropriation, applied to appoint new trustees who were willing to fight the US confiscation on their behalf as beneficiaries.
Citing a judicial ruling from the Cayman Islands, Justice Kit Toogood allowed the application.
Matt Nippert’s coverage in the NZ Herald cited court documents that showed the trusts own more than $US230 million of assets, including a Bombardier private jet, a hotel in Beverly Hills and a $55 million Los Angeles mansion. In New York, they own two Manhattan apartments, including a $43 million penthouse in the Time Warner Centre.
From that court case, we caught yet another glimpse of the sorts of riches that are hidden behind New Zealand-based trusts and where they may have come from. And these, Rewcastle Brown alleges, are only the tip of the iceberg.
The damning Sarawak Report post mentioned above was titled Trust Us — New Zealand Can Hide Your Money! It stated: “Time and again, investigators like Sarawak Report find themselves tracing large businesses linked to, for example, Malaysian politicians like Taib Mahmud, only to find the money disappearing behind New Zealand trusts.
“This was thrown into glaring perspective by the Panama Papers, which revealed how shadowy businessmen the world over were all choosing distant New Zealand to park their money… and one assumes such people are neither attracted by the weather nor the convenience of New Zealand’s location.”
Ah, the Panama Papers, that so many dismissed as a damp squib! When the documents burst onto the world stage in April 2016, John Key, of course, adopted his usual “nothing-to-see-here” approach, until public outrage forced him into accepting the need for an inquiry.
In his report on New Zealand’s foreign trusts, tax specialist John Shewan found no direct evidence of abuse but conceded there was a reasonable likelihood the regime was facilitating the hiding of funds or evasion of tax.
He recommended reforms, including wider disclosure rules (which Key had repeatedly said weren’t necessary), to preserve New Zealand’s reputation as a nation that co-operates with others to counter “money laundering and aggressive tax practices”.
The bill incorporating Shewan’s recommendations is currently before Parliament and soon to become law. It includes requirements for foreign trusts to register with Inland Revenue and provide particulars of all parties, including the settlor and beneficiaries, and assets. They will also have to file annual returns and pay registration and filing fees. The register will be searchable by the police and Internal Affairs.
Key and the then Revenue Minister, Michael Woodhouse, also strongly denied New Zealand was an international tax haven. Shewan couldn’t bring himself to apply the term to us either but Rewcastle Brown has no such illusions.
Foreign trusts, she says, are used by “the generally criminal classes of super-rich to conceal their wealth and to avoid paying the tiresome taxes that less well-off people have to pay. By pretending that there is seriously any other substantial reason the tens and tens of thousands of wealthy people across the world set up New Zealand trusts, the country’s finance industry is participating in the fraud.”
In the wake of the 1MDB revelations and the High Court case in January, Andrew Little described Shewan’s report as “naive”.
Rewcastle Brown also finds it unusual that Shewan didn’t discover any evidence of illicit activity and suggests in her article how she could help him get on top of the question. She offers an analysis of how a combination of a United States and a New Zealand trust and a shadowy Delaware corporation may have been used to hide money that the US Department of Justice alleges was stolen from 1MDB by Emirati businessman Khadem Al Qubaisi, who is now in jail in Abu Dhabi.
Rewcastle Brown wrote: “Perhaps this might help spell out for [Shewan] and New Zealand legislators the extent of the global problem, which is caused by the deliberately lax laws that have become such a nice little money-spinner for a section of their finance industry?”
The question remains whether the new law will clean out all the illicit money and tax evasion that Rewcastle Brown believes our trust system is protecting.
On the face of it, it looks as though it will quickly make life a lot more difficult for anyone who wants to hide money here out of the sight of overseas jurisdictions.
IRD has always been proactive in releasing any information it thinks tax treaty partners would be interested in knowing but it has too often had very little to pass on. When the law comes into effect, however, the IRD will be getting “information on a plate”, as one senior tax specialist put it, rather than having to ask for it.
The new regime will extend the disclosure protocol that currently applies to Australia. The IRD will provide basic information on settlors and beneficiaries to treaty partners annually (unless it is concerned about how that information will be used if it is disclosed). If any jurisdiction wants additional information, it can come back to the IRD for more.
A decade ago, Australia was worried about our trust regime being used for tax avoidance and, from 2006, New Zealand began informing Australia whenever its citizens set up a trust here. Australian settlors quickly became a negligible fraction of those setting up trusts in New Zealand even as the total ballooned — which perhaps answers the question of what a lot of foreign trusts have been used for.
Labour proposed also setting up a searchable public register of foreign trusts — which was an option that Shewan floated in his inquiry report then rejected.
When Andrew Little recommended a public register in a parliamentary debate after Shewan’s report appeared last year, Woodhouse dismissed it: “Any suggestion that the salacious searching of the public register would be necessary or appropriate is just inappropriate.”
“Salacious” epitomises the government’s negative view of the motives of those — including journalists such as Nicky Hager — who want to shine a light into a very murky area of our society. In fact, the most abiding mystery in the whole foreign trusts debate is why the government has taken so long to deal with problems about New Zealand’s reputation as a tax haven and money-laundering depot. The Treasury, the IRD and organisations such as Transparency International had communicated their concerns for years, and had been ignored or — in the case of the IRD — actively thwarted. The government acted only when the Panama Papers made it impossible not to.
It couldn’t plausibly have been because of a desire to protect a significant part of the economy given that the fees to lawyers and accountants administering foreign trusts amount to around $24 million a year — a tiny proportion of our total exports of more than $67 billion.
Or was it simply a desire to protect the interests of the mega-wealthy — for reasons we can only guess at?
We’ll probably never know. Just as we’ll probably never know why John Key was the only national leader to be singled out by name in the manifesto accompanying the release of the Panama Papers.