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John Key keeps lid on hidden billions (Video)

Mossack Fonseca & Co specialises in setting up offshore companies. The law firm in Panama City is at the centre of an international scandal over foreign trusts.

Within days of the release of the Panama Papers in April, the major players behind New Zealand's embattled foreign trust sector began a lobbying campaign that has helped to minimise changes that would identify their secret clients.

These clients, who reportedly hold tens of billions of dollars in New Zealand foreign trusts, are the victims in this story, terrified by the threats of kidnappers - or so industry figures claim. It's the reverse of the picture painted by the 11.5 million documents that comprise the Panama Papers.

Prime Minister John Key introduced legislation in August to amend disclosure rules for the country's 12,000 foreign trusts, a move triggered by media coverage of New Zealand's links to Panama law firm Mossack Fonseca.

John Key has described criticism of New Zealand's foreign trust laws as a media beat-up.

The disclosure bill, which is now under review by select committee, has the singular feature that it arguably does not increase disclosure.

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Documentary records dating back to 2014 show the back story of politics, lobbying, back-room deals and fast footwork that has shaped the government's response - and how the industry has fought back to protect its foreign clients.

Tax expert John Shewan called for a shake up of New Zealand's laws around foreign trusts.

It's crunch time now for the sector as the select committee offers a last chance to water down the disclosure changes even further, as industry submissions challenge the amendments virtually clause by clause.

Under the 2006 rules that govern the sector, trusts for foreign investors who don't live or earn money in New Zealand are tax-free. But this has two problems.

As the number of foreign trusts exploded from 2000 in 2006 to 12,000 today, it became clear foreigners could use the trusts to evade their own countries' tax, which hurt New Zealand's reputation.

The second problem was that foreign trusts didn't have to tell the government anything about what they were doing or where the money came from - so in any crisis or scandal, the prime minister had no idea what was going on.

That was a risk to politicians' reputations. Yet for a decade that didn't seem to be a problem.

Documents obtained by the Greens under FOI show that by December 2014 the Treasury was warning that "the perception that we might be a tax haven are [sic] damaging to New Zealand's 'clean' reputation. This can only get worse . . ."

It wasn't even clear how many foreign trusts there were because of "the existence of structures whose purpose is to defeat the statutory disclosure requirements".

The sector in effect was becoming ungovernable, Treasury argued.

Industry figures became so worried about Treasury's plans that Ken Whitney of the Antipodes Trust Group wrote to the then Revenue Minister Todd McClay asking for a meeting.

Whitney is Key's personal lawyer, and he didn't hesitate to address his concerns directly to the PM.

"I have spoken to the prime minister about this and he advised that the government has no current plans to change the status of the foreign trust regime," Whitney emailed McClay on December 2, 2014 (Key says that Whitney misunderstood him).

The following day a McClay staffer emailed senior Inland Revenue officials that the minister had "expressed concern that one of the options that will be presented to him ... would be a removal of the foreign trust regime".

McClay met with Whitney and other industry leaders in the Antipodes Trust office in Auckland on December 18, 2014.

Treasury discussions about a review kicked around until May 2015 but the issue went nowhere.

Coincidentally even as Whitney was lobbying McClay and Key, on the opposite side of the world German newspaper Süddeutsche Zeitung was talking to a mysterious "John Doe", who held 11.5m documents from Panama law firm Mossack Fonseca.

To tackle the huge leak Süddeutsche Zeitung called in Gerard Ryle's International Consortium of Investigative Journalists which set up an international collaboration to cover what became known as the Panama Papers.

It included a section on New Zealand clients and foreign trusts.

On Monday, April 4, this year the Financial Review revealed New Zealand had a key role in a political scandal in Malta.

Key had attended a CHOGM meeting in Malta last November unaware that senior Maltese government figures were secretly setting up foreign trusts in New Zealand linked to Panama companies operated by Mossack Fonseca.

At the time of the CHOGM meeting Mossack Fonseca was desperately trying to find a bank - any bank - around the world which would open an account for the Maltese energy minister, Konrad Mizzi, and Keith Schembri, the chief of staff to prime minister Joseph Muscat.

Even some of the world's shadiest banks declined, because of the strict disclosure laws to prevent money laundering by political figures.

There had been no such difficulty in setting up trusts in New Zealand.

"Yep. That is why I was trying to front foot it all those months ago," Treasury adviser Andrea Black emailed a colleague on April 4 about the Malta story.

After questions that the Financial Review put to Key the previous Friday, Treasury drew up three briefing documents, which noted that according to Inland Revenue data foreign trusts generated $24 million in fees and local employment, and that the local sector paid $3 million in tax.

This is next to nothing. In comparison to New Zealand's $50 billion-plus in export earnings it's a rounding error. And as the tax total includes GST payments of 15 per cent, the big local players appear to pay very little income tax.

The Financial Review story on April 4 made headlines in Europe and Panama and triggered huge protests and fiery political exchanges in Malta.

In Australia, Tax Commissioner Chris Jordan revealed that close to 10 per cent of Mossack Fonseca's Australian clients were linked to serious crime, and has since found widespread tax avoidance.

The position for the NZ government was excruciating, as the Financial Review and later Radio New Zealand, One News and journalist Nicky Hager cited story after story of controversial clients of Mossack Fonseca using New Zealand trusts to hide money.

Tax consultant Nick Beresford estimated foreign trusts held tens of billions of dollars in offshore assets, with all earnings tax free in New Zealand. And the government had explicitly chosen to know nothing about any of it.

In one bewildering passage Key claimed that the Financial Review had "a journalist who's had a longstanding view that Australia cops it sometimes and New Zealand doesn't and actually that's because Australia has quite a different structure but actually New Zealand is not a tax haven, it's not right, some of the criticism . . . [but] people are entitled to their own views."

A spokeswoman for Key declined to elaborate. "The Prime Minister commented on this widely at the time and we have nothing further to add," she said in an email.

On April 11 as the Financial Review and New Zealand media coverage widened, Key announced an inquiry led by former PricewaterhouseCoopers chief John Shewan.

Key's initial reaction had been that there was no need to change the foreign trust laws and this would be a recurrent theme in heart-rending industry submissions to Shewan's inquiry: it was all a media beat-up. And foreign trusts certainly had nothing to do with avoiding tax.

The NZ Trustee Companies Association described their role as providing "family counselling services" and protecting their foreign clients from "unfair expropriation of wealth" and "criminal cartel violence".

It's a perennial claim. UK reports on tax havens have cited the risk of kidnap, as did Australian lobbyists resisting disclosure measures for wealthy Australians last year. John Hart of the Society of Trust and Estate Practitioners cited the risks that clients faced from having assets misappropriated by corrupt government officials and "the risk of kidnapping and extortion by criminal elements . . . Asset protection takes on a whole new meaning for such clients."

TGT Legal described the "grave risk to extortion, kidnap and other harm".

Nick Beresford of Blackmore Virtue & Owens wrote of the "extraordinarily high rates of kidnapping for ransom, which is often carried out by drug cartels and other organised crime groups" in South America.

In an article published in August Victoria University's John Prebble QC agreed with Shewan's finding that some foreign trusts were probably being used for tax evasion, but argued that many clients "would be happy to pay the taxes that they owe to their own countries' revenue services, but if the revenue department itself is corrupt, simply paying taxes can lead to having your children kidnapped".

Prebble seems to be arguing that they were only safe if they retained complete secrecy on their income and paid no tax at all. They did it for their children.

As in Australia, there was no indication that New Zealand police or security agencies supported such claims, or that they had even been consulted.

And the Panama Papers? As one of the largest suppliers of offshore services in the world, Mossack Fonseca's files should be full of examples of family counselling and kidnap worries. Of the 11.5 million documents, only 140 contain the word "kidnap", and virtually all of these are compliance checks on Mossack Fonseca clients which throw up names of criminals who have similar names.

To be clear, Mossack Fonseca's only concern was not whether their clients could be kidnapped, but whether the clients were themselves involved in kidnapping other people. In several instances they were.

One Chinese client coming to Panama worried about safety: "I've heard too much news about kidnap and murder recently."

Mossack lawyer Li An Chong told him it was a media beat-up.

"The short answer is that Panama for the most part is much safer than many large metropolitan areas of the world," he wrote.

Shewan handed in his report at the end of June, concluding the laws were inadequate: "The rules are not fit for purpose in the context of preserving New Zealand's reputation as a country that cooperates with other jurisdictions to counter money laundering and aggressive tax practices."

While Shewan ignored the kidnapping claims, he made several references to New Zealand as a "safe place".

He cited the government's policy of encouraging foreign investment, though as foreign trusts are specifically barred from investing in New Zealand this appears to have been tongue in cheek.

"It's important to note the review that noted that foreign trusts are legitimate vehicles and that New Zealand's tax treatment of foreign trusts is appropriate," a spokeswoman for Key told the Financial Review.

The new laws before parliament are largely in line with Shewan's recommendations and will require foreign trusts to file with the Inland Revenue Department extensive details of beneficiaries, settlors and assets when a foreign trust is set up and yearly updates on distributions.

The NZ Police Commissioner will have access to the records, as will the Inland Revenue Department (IRD). But no one else will. Tax treaty partners can only get access to the records if they ask for them.

That is, a country like the United States can only ask who is behind a foreign trust if the US already knows the answer. That's little change from the current position, comparable with the information exchanges offered by the Caymans or Bermuda.

At least the government will not be caught flatfooted again, unable to respond to leaks like the Panama Papers.

How well the new rules will safeguard New Zealand's reputation is yet to be seen, but it's a shot in the arm for that other critical measure: it will be marvellous for protecting the reputation of politicians.


Prime Minister John Key says most of the changes to foreign trust rules, recommended by tax expert John Shewan, will be put in place.