Infested with Panamanian Rorts!

By now, most people in the reasonably developed world will have heard of Mossack Fonseca, the Panamanian law firm whose activities have led to New Zealand being called a tax haven. Well, right now it doesn’t feel like it to me, as it is time for me to start preparing my tax return. However, the history of this is quite interesting. After the first release of information, our Prime Minister, John Key, did his usual performance when something is not going his way: he smiled and said sort of derisively that NZ is not a tax haven, and there was nothing in this. His standard operating protocol is to dismiss the accusations and say not much more, on the basis that if he says nothing, it all runs out of steam. This time, however, it did not.

The next step was that the reason for the accusation became public. Part of New Zealand tax law is, if you do not earn anything in New Zealand and you do not reside here, you have no tax obligation. That seems reasonable. But what has happened, apparently, is that thanks to Fonseca and an Auckland law firm, Bentleys, a number of foreign trusts have been set up here. Now, since they have no tax obligations, they do not have to file a return, and that means there is a small black hole between the money and the owners of said money, and Fonseca has complicated the issue by having the New Zealand entity owning trusts elsewhere, and so on. What it does is to make it very difficult to track down who the rich are that are using such mechanisms to evade tax. It is also important to note there are sometimes good reasons for foreign trusts. If you live in a country where dictators are likely to confiscate everything if your political views are wrong have good reason to put their money offshore.

The answer to this, of course, is reasonably simple: the trusts should have all their owners and their activity declared. Total transparency does not worry the legal (given that tax authorities must maintain confidentiality, other than for prosecuting for tax evasion). If there is a chain of trusts, the chain should be explicitly declared. So, why has this not been done?

Here comes the problem for Key. Apparently two or so years ago, our IRD started to consider what it should do about such trusts, as they were blossoming. A certain Mr Whitney, Key’s personal lawyer (at least that was how it was described in the media initially, but there seems to be some accusations that he is no longer a lawyer) approached Key and asked about the issue. (Nothing wrong there.) What Key replied is unclear; he says there were no current plans as far as he knew and Whitney should see the appropriate Minister. Fair enough. Then it is unclear what happened because there is some accusation that Whitney asserted to the Minister that there should be no action. We have no real idea what happened, but the next thing is the Minister stopped the IRD from future action on these trusts. Whitney, it appears, was another lawyer running such trusts.

Then, suddenly, Key bounces back, triumphant. Some of these trusts that people are complaining about, says he, have the Red Cross, or Greenpeace, or Amnesty International as beneficiaries. In an attempt to dispose of another problem with one brush, there are arguments that Auckland’s property boom is being driven in part by foreign trusts. Key announces that only 3% of sales are to foreigners. However, perhaps he should have thought before putting mouth into action. It turns out that the Red Cross, Greenpeace, Amnesty, etc, know nothing about these trusts. What the likes of Fonseca, or whoever draws up the trusts, have done is to name beneficiaries on these trusts to allay the tax authorities, but they are fraudulent. Then for the property sales, it turns out that foreign trusts were excluded from the statistics. Why do house sales matter? Well, it appears people of unknown origin have turned up with suitcases of hundred dollar notes to pay. Soon after, the house is sold, and since there is a bubble progressing, at a profit. Now, New Zealand has an excellent banking system, so what’s the betting this is money laundering?

Obviously, we need more action from the government to make all this transparent. Tax evasion by the very rich is bad; the laundering of drug money is certainly worse. At this point I should emphasize that I am not in any way accusing Key of corruption. On the other hand, he has made a personal fortune as a trader in one of those banks, so he is hardly likely to mount a crusade against such activities. And herein lies the problem. Sloth and indolence from those who we vote in to make life fairer for all is just as bad, if not worse, than actual involvement. A further curse of what we call democracy (but is not) is that politicians want to stay in power, and they have a vested interest in not annoying the people that give their party the big donations to mount election campaigns.

Of course, on the world stage, so far New Zealand’s role is rather small as far as New Zealand citizens go, at least as far as we know. But the impact of slothful regulation might be huge. As Ellen Zimiles, a former New York federal prosecutor noted, fraudsters like offshore because the lack of transparency makes it very difficult for investigators to get at the ultimate beneficiary. And, of course, New Zealand is hardly the only guilty party.