New Zealand: Beneficial Ownership Registers

More recently the FATF has released Recommendation 25, including recommendations relating to the transparency and beneficial ownership of “legal arrangements”, including trusts.

Where is New Zealand at in terms of these proposals? The answer is: not very far along the road.

In relation to companies, a project to review and reform company law was announced in August 2024 by the centre right coalition government. However, the proposed reforms did not give consideration to creation of a beneficial ownership register, which has caused some consternation with NGOs such as Transparency International. It would seem that under the current government, the introduction of such registers is not a priority matter, however, it is probably inevitable at some stage (whether under this government or a future centre left government) that some sort of beneficial ownership registry for companies and limited partnerships will be introduced. In the meantime, it is not uncommon for shares in companies to be held by nominees or bare trustees on behalf of beneficial owners, although anecdotally, this would appear to occur only in a small percentage of cases.

In the writer’s opinion, most lawyers, accountants, and other service providers, would accept a requirement for such registers to exist, although their imposition can be a little harsh in that whilst they may supposedly combat some illicit activity, it is also an invasion of privacy for individuals who wish to be discreet regarding asset ownership.

Moreover, the inevitable point to make is that those conducting illegal activities will most likely simply not comply with directives regarding declarations of beneficial ownership, so the register regime would do the usual thing of ‘keeping the honest honest’. In this regard, it is not dissimilar to firearm licensing, for example.

Interestingly, one of the government’s proposals under the company law reform measures being considered at the moment is to introduce a unique identifier for company directors and general partners. This will help with identifying and enforcing poor and illegal business practices, including ‘phoenixing’, by making it easier to identify all the companies a director is associated with. The proposals would also permit directors and shareholders to replace their residential addresses with an address for service on the Companies Register. This will address the safety and privacy concerns that directors and shareholders may have about their home addresses being publicly available.

‘Phoenixing’ is the practice of placing a company into an insolvency process with the business/assets being transferred to a new company owned and/or controlled by parties connected with the insolvent company, often leaving creditors in the lurch.

With regard to beneficial ownership registers for trusts, in the writer’s opinion, this is unlikely to find favour in New Zealand unless we are unfortunate enough to end up at some stage with a hard left government. Hopefully, that is unlikely to happen, given the nature of our mixed member proportional representation electoral system, which inevitably results in coalition governments made up of parties who may not be aligned on most things.

Trusts are used domestically in New Zealand by many New Zealanders, both rich and not so rich, because, for the moment, they are not subject to a penal tax treatment as is the case in other jurisdictions, and they continue to be very popular vehicles for succession planning and asset protection.

The concept of having a public register of ‘ownership’ of trusts (a strange concept given that beneficiaries generally have a mere expectancy) would not find favour, in the writer’s opinion, with the majority of New Zealanders. It would amount to a substantial intrusion into personal financial privacy, which could create serious risks for high-net-worth individuals (and others). Arguably, it could create more mischief than is likely to be resolved, particularly given that – as with companies – criminal elements will simply not comply.

At present, New Zealand has a reasonably comprehensive domestic trust reporting regime for trusts that are taxpayers, which provides the Inland Revenue Department (IRD) with quite comprehensive information, enabling the IRD to see what trust assets hold and what income is generated, and the connected parties associated with the trusts (settlors, protectors, beneficiaries). This information can be used for tax enforcement and tax policy development, and in the criminal context, the information would be able to be shared by IRD with the Police, Serious Fraud Office and other law enforcement agencies.

The domestic reporting regime is similar to the foreign trust reporting regime introduced a number of years ago, which applies to trusts settled by non-New Zealand residents. That regime also allows information to be shared with law enforcement bodies and foreign Revenue Authorities, in certain circumstances.

In the writer’s view, the status quo is probably the best compromise in that the information provided to IRD for domestic trusts is more comprehensive than used to be the case prior to the introduction of the new reporting regime a year or so ago, without throwing open that information to all and sundry.

AML Reform

According to the Associate Justice Minister, New Zealand’s anti-money laundering and countering financing of terrorism (AML/CFT) regime will move to a single supervisor model, and a new industry levy will help pay for reforms. The intention is to “reform key sectors where the cost of regulation is overly burdensome for businesses, and improve the efficiency and effectiveness of the AML/CFT system to meet international standards”.

These changes were announced in 2024 following an FATF evaluation and a review of our 2009 AML/CFT legislation.

The Minister gave the optimistic overview that the “reforms will allow the system to be more responsive to industry and community needs, more agile, and more focused on the real risks imposed by money laundering to New Zealand businesses”.

For those of us who deal with the regime at the coalface, there may be an element of cynicism regarding the government’s hope for streamlining and simplifying compliance, whilst at the same time achieving the objectives promoted by the FATF.

One bugbear for those involved in the sector is the need for address verification, and the challenges of achieving this in the modern world where it can be quite difficult to obtain ‘original’ documentation that adequately verifies an individual’s address.

The Statutes Amendment Bill has already been released to address this, however the convenor of the Law Association’s AML committee considers that it would not fix the problem as the “ambiguity of the wording and the threat of incurring penalties from the regulator would prompt many businesses to default to costly address verification, which was the opposite to what the amendment intended.”

The amendment to the regulations is somewhat circular, tantalisingly holding out the prospect of not needing address verification, but only if the reporting entity determines that there is a low level of risk. It is not an ‘all or nothing’ scenario either. Depending on the level of risk, there may be an obligation to take “reasonable steps to verify”: in other words, there appears to be a continuum of reasonable steps depending on the level of risk. A simple exemption from the address verification requirement would be the preferred outcome in circumstances where only standard due diligence is required.

Another hoped-for amendment is contained in the Regulatory Services (Justice) Amendment bill, which provides that ‘low risk’ trusts will no longer have to collect source of wealth or source of funds information. In other words, standard due diligence requirements apply, not enhanced due diligence. This is intended to make life easier for reporting entities dealing with ‘ordinary’ domestic trusts. However, as always, the devil is in the detail, and as with the other amendment canvassed above, the new wording is somewhat circular and does not necessarily give the comfort hoped for. Conservative reporting entities will probably continue to conduct enhanced due diligence, to minimise the risk of criticism or sanction by the AML regulator.

The reporting entity can dispense with source of wealth/funds enquiry if they are “satisfied that any [emphasis added] risks have been mitigated by conducting standard… [or] enhanced due diligence”. The last reference seems to be completely circular.

The Law Association Committee, together with many AML advisers and senior compliance personnel, have pointed out that the legislation was designed for large financial institutions and “is not fit for purpose as it relates to professionals”.

Other challenges for lawyers include the difficulty of not infringing legal privilege in certain circumstances such as having to make a suspicious activity report.

It may be a forlorn hope that a more suitable approach to AML regulation can be brought in for reporting entities which are not financial institutions. It will be interesting to see how constructive the government and officials’ approach to consultation with those affected by the regimes will be.

John Hart
John has specialised in tax and trust law since 1984. John provides tax and trust advice to a wide range of New Zealand and offshore corporate and private clients, and not-for-profit organisations. The majority of his work is cross-border/international in nature. John is a frequent presenter at conferences in New Zealand and internationally and has authored numerous publications on tax and trust law issues. He was a part-time Teaching Fellow at the University of Auckland for the Master of Taxation Studies degree. John was Founding Chairman of the New Zealand branch of STEP and has served as a STEP Worldwide Council member.