NEW ZEALAND has been urged to tighten its company registration process by one of the authors of a major international study into the use of anonymous shell companies by terrorist and corrupt government officials.
Global Shell Games: Experiments in Transitional Relations, Crime and Terrorism by Jasson Sharman, Michael Findley and Daniel Nelson, [to be] published later this month in the United States, launched a series of stings to determine whether international regulations were met ensuring beneficial owners of shell companies were recorded.
The study made 7400 inquiries of 3700 incorporation agents in 181 countries – including New Zealand – to determine if Financial Action Task Force recommendations were followed.
The results found patchy adherence to regulations. The case of SP Trading, a New Zealand shell company that leased a plane used to run guns from North Korea to Iran via Bangkok in 2010, opens the book and receives considerable scrutiny.
SP Trading was formed by incorporation firm the GT Group, which had enlisted Burger King cook Lu Zhang as a nominee director. Zhang was paid $15 for each directorship, and knew nothing of who was using her company to breach United Nations arms sanctions.
Sharman, a professor at Griffith University in Australia, said the SP Trading case was “lurid” and the GT Group’s shell companies had been involved in other cases of alleged government corruption.
Following international outcry and an ultimately futile investigation into the SP Trading case, the GT Group left New Zealand, rebranded and was last reported to be operating in Malaysia.
Sharman agreed New Zealand’s present regulations, allowing offshore directors of locally registered companies , effectively puts information about beneficial owners out of reach of domestic authorities.
Even if the offshore director is in a friendly jurisdiction, red tape involved in taking an investigation transnational is time-consuming, Sharman said.
“I was just talking to law enforcement in the United States, and anytime they make a Mutual Legal Assistance request, it takes three months just to fill out the paperwork. A lot of law enforcement types think – ‘oh well, too much work’.”
Sharman said having a local point of contact, required to maintain beneficial ownership information, was vital to enable the enforcement [of] international anti-money laundering regulations.
The Companies and Limited Partnerships Amendment Bill would require all New Zealand -registered companies to have a local director, but has languished since being introduced by former minister Simon Power in 2011. It is awaiting a third reading since the commerce select committee reported back in Parliament in December 2012.
Sharman and his fellow authors discovered, through interviews with New Zealand government officials, why measures to tighten company registration procedures to prevent a recurrence of the SP Trading case have been so slow in progressing to law.
“The relevant governmental officials were reluctant to reform the country’s corporate laws. They explicitly feared jeopardising New Zealand’s Doing Business ranking,” the authors write.
The Doing Business rankings are an annual league table prepared by the World Bank assessing how easy it is to start a business in various jurisdictions. New Zealand has ranked first in the world each year since 2009.
Commerce Minister Craig Foss said in a statement he hoped to turn the bill into law by the end of the year.
Foss said the Companies Office unit, set up in the wake of the SP Trading case, has been active in investigating suspect shells and deregistering those that did not comply with current regulations.
“In the past 18 months, 1096 companies have been removed from the register and 67 site visits have been conducted to registered office addresses as part of the Companies Office enforcement work.”
Internationally, Global Shell Games authors found that including warning flags in shell company applications that they might be used into launder corruptly obtained funds made no difference in compliance rates.
Even posing as a potential terror organisation made only a minor difference to incorporation agents’ willingness to bend rules and sell untraceable shell companies.
One respondent in Florida wrote in response to the authors’ request: “Your stated purpose could well be a front for funding terrorism, and who the [expletive] would be involved in that…I wouldn’t even consider doing that for less than 5K a month.”
The study found that “directly counter to conventional policy wisdom” incorporation agents most likely ignore customer due diligence requirements were from Delaware, Wyoming and Nevada in the United States.
Overall United States incorporation agents, excluding law firms, collected adequate identity verification documents only 8 per cent of the time. By contrast, tax havens like the British Virgin Islands, the Cayman Islands and the Isle of Mann were the best-behaved in the world with compliance rates at close to 100 per cent. New Zealand-based incorporation agents – who are not the only outlets selling New Zealand registerd shell companies – also performed well, and were found to be compliant in 86 per cent of cases.
Sharman said the results should force a rethink from a current strategy that focused on whether countries had signed up to rules, to one that focused on whether they were being enforced.
Sunday Star Times
Warning over shell companies
Business. March 9, 2014. By Matt Nippert. Pages: D1 and D5.