New Zealand: a Great Place to do Business…and Scams

By Richard Smith

The little story NC carried a couple of months ago about New Zealand scam companies has come out from behind the paywall, courtesy of the NZ Herald (hat tip: John G.), and with the help of some nice follow up from Niko Kloeten of New Zealand’s National Business Review. We hinted at the time that the problem’s large and nasty, and the NZ Government admits this in a cabinet paper:

A New Zealand registered company with its effective base in Panama recently committed a significant tax fraud in the United Kingdom. This sort of fraud affecting our OECD partners impacts negatively on New Zealand’s international reputation.

IRD is concerned that New Zealand will receive a poor report in an OECD forum later this year because it is unable to provide information which many other countries would be able to supply about such companies.

There seem to be rather a lot of banks, for instance (one “offshore financial institution” for every 5,000 New Zealanders):

Power also says that the Reserve Bank believes about 1,000 shell companies incorporated in New Zealand over the past three years have been used to carry out banking activities free of regulatory oversight and “many” seem to be undertaking fraudulent activities.

The Reserve Bank has received frequent complaints and enquiries about “offshore financial institutions” incorporated in New Zealand but with no other connection to the country.

“It estimates that there are at least 1,000 such companies on the register, of which a number are suspected of carrying out fraudulent activities.”

Naturally, there’s now a bit of ministerial headscratching about possible solutions. This seems to be the nub of it:

Power puts forward four major changes. These are; Requiring companies to appoint at least one director or an agent who is ordinarily resident in New Zealand; Requiring directors to supply date and place of birth information; Requiring all companies to apply for an IRD number as part of their registration application process; and Bolstering the ability of Registrar of Companies Neville Harris to investigate, respond to or remedy issues arising in regard to “the bona fides” of directors and shareholders and any integrity or compliance issues relating to company registration.

So, will that work? It’s a mixed bag.

Requiring a resident director: a prior NC post pointed to existing dubious New Zealand finance companies that have local directors. The post also sketched out how easily they can be recruited by faceless overseas types. As far as I can see this requirement just makes it compulsory for dubious overseas types to do something they were doing already.

Requiring directors to supply date and place of birth information: would be fine, if there was a way of checking that it’s not made up! For foreign directors, that’s quite an overhead, at least, and most likely, impossible. Readers may remember an NC post that mentioned the will-of-the-wisp Rod Alvar, a company director in NZ and Panama and Sweden, each time with different addresses. Making up a date and place of birth for the likes of our Rod is just a few extra keystrokes. This requirement won’t make much difference for overseas directors.

Requiring an IRD number from companies: the IRD number is a unique number issued by NZ’s Inland Revenue. The company application form for an IRD forces disclosure of shareholders. This could be a really good idea (and trust the IR to come up with an idea that has some teeth). But there’s still a ‘but’ – are the shareholders individual people, or nominees? Nominees could still be pretty much anyone anywhere.

Another worry with this measure must be that it might be too fierce to make it into the final legislation. Disclosure of shareholders certainly doesn’t sit well with John Key’s vision of NZ as a prosperous tax haven. Those tax-avoiding types strongly resemble gangsters, moneylaunderers and fraudsters in at least one respect: they love their anonymity. Lastly, if this disclosure requirement is in place, the info has to flow from the IRD to the Companies Register. That might take a spot of budget.

So out of three measures we appear to have one with a half-chance of having an effect.

That just leaves the Company Registrar. Let us hope that he gets some useful new powers (and some assistants), because it looks like it will be more whack-a-mole for the Registrar!

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  1. deeringothamnus

    Funny, Canada is simililiar. In the anglo part of North American, the fancy crooks are in New York, and the cheap crooks are in Toronto, which stock exchange has a well earned bad reputation for white collar crime. I would not trust a Toronto stock exchange company as far as I could kick it.

  2. Ishmael

    I worked in Australia about 20 years and thought it was the crookedest place I ever saw. Then worked for a NZ CEO of a NYSE and quit within a year because the guy could not tell the truth on anything. I uncovered tons of fraud that he had his fingers in. Finally, I was going to be an expert witness against a NZ CFO for a public company in US. She decided to plead quilty on fraud charges.

    When I worked in oz, I expected in time that OZ would raise up to US standards but unfortunately we have sunk to theirs. Business ethics in the US has declined significantly over 30 years.

    It use to be I only trusted audited financials out of North America, UK and Germanci countries. Now I do not even trust those. With turnover in the CFO office every 18 months on average there is huge pressure to generate the numbers the CEO needs to keep his job opps I mean run his business.

    One last thing, came in as a consultant on a chinese reverse merger. Looking over the financials within a day I found 14 signficant weaknesses/potential accounting errors in an S-1 they filed. SEC generated about 18. Of course the head of the audit committee was an ex Big 4 partner out of Oz. Did nothing about it but collect his check. I was fired but now the SEC is all over their ass and they have lost 87% of their market cap since then.

    1. Some Bloke from Australia

      Yeah, those are just great anecdotes. No examples of anything, just the broad-brush statement. Oh yes, let’s all look up to the mighty US and it’s Big 8, no 7, no 6, no 5, no Big 4 accounting companies and all of their reputable accounting work in the US.

      And while you’re at it, presumed Americano, maybe you could ask that your responsible government continues to admonish other countries about torture, human rights, due process, etc….

  3. Ishmael

    I meant to say 20 years ago.

    Worked in Canada also. Found their standards about comparable to the US for as good or bad that is. Some of it depends on the industry.

    Working on the Chinese reverse merger which was in the mining industry, a friend of mine said one day “Don’t fly in any helicopters.” This was in reference to about 10 years ago a geologist supposedly falling out of a helicopter in New Guinea working on a canadian gold mining company. Seems that the so called find was all a PR stunt and the geologist had core samples which showed no ore.

    On the other hand I have been involved with my share of gold companies. Usually juniors and most are just holes in the ground.

    1. Another Gordon

      There is a saying in the mining industry that, “Many a profitable prospect has been compeletely ruined by putting it into production”.

      1. Ishmael

        That is funny Gordon. My grandfather use to tell me about oil men, “the only guy more crooked than a cattlemen is an oil man because he can talk the cattlemen to put money into a hole in the ground.”

        I wish to clarify, their is a thin line between a “promoter” and a fraudster.

    2. Francois T

      This geologist in Indonesia; you are referring to the Bre-X scandal, correct?

      My memory is not terribly accurate on that, hence my question.

      Thank you!

      1. Ishmael

        Francois – I believe it was Bre-X. High flying TSE on a major gold find in New Quinea which went down in flames when the ore samples ended up not having any ore.

  4. b.

    “Disclosure of shareholders certainly doesn’t sit well with John Key’s vision of NZ as a prosperous tax haven. Those tax-avoiding types strongly resemble gangsters, moneylaunderers and fraudsters in at least one respect: they love their anonymity.”

    Shouldn’t it read “Key’s vision of NZ as prosperous tax criminal haven” then?

  5. Psychoanalystus

    I don’t know the state of New Zealand and Australia nowadays, but back in the 80s I was running my own software company, selling mass market products we developed all over the world. I never had any problems in Australia or NZ, and I felt my dealers over there were honest, and also sold a lot of product. The same was true about the US and Canada. However, I had a very bad experience in the UK and Germany. In particular, the UK software business was ran like a mafia operation with dealers driving around in bullet-proof cars with body guards around, starting bar fights at conventions in the US, and other such low class behavior. Three years ago I spent a few months in the UK, and felt the place was just as low class as ever.

  6. Ishmael

    The kind of fraud I am referring to is financial fraud, like what you put into a prospectus. It general in most countries the attitude use to be that this kind of fraud was not as bad as stealing money with a gun.

    In the US 30 years ago we had a strong SEC as well as attorney/accounting ethics. In the last 30 years this has greatly degenerated probably starting at Clinton/Levitt era. Hell, I was at a NYSE and performed write offs of close to 8% of the top line and never even got an inquiry. This was writing off past frauds as far as I am concerned.

  7. Keith

    NZ has an ETS and Australia will be getting one soon also. Fits the pattern of fraud. ETS is almost a litmus test for fraud : Europe, Canada, NZ. Yep, all have ETS and all are fraudulent.

  8. Kiwi Lurker

    Richard, you might be interested to note that Naked Capitalism gets a mention in this article about this:

    I sent Russell Norman an email about this and a link to your original blog, after which he posed some questions. The answers were pretty pathetic non-answers, but credit to Russell that he followed up with some more–that have not been answered yet.

    Glad to see NC getting some credit. Keep up the good work, Richard.

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