Draft bill does little to stop corruption

MORE TO BE DONE: Commerce Minister Craig Foss's bill to clamp down on dodgy shell companies is "inadequate".
MORE TO BE DONE: Commerce Minister Craig Foss's bill to clamp down on dodgy shell companies is "inadequate".

New Zealand has an enviable reputation as a country where it is both easy to do business and our economic environment is untainted by corruption. Let's not let the former sully the latter.

Rot in our companies register set in years ago, and bubbled to the surface in late 2009 when New Zealand-registered firm SP Trading chartered a plane to smuggle tonnes of weapons to North Korea.

Despite this high-profile blot on our reputation - covered in the Wall Street Journal and on CNN among other outlets - it has taken more than 2 years for the Government to introduce a small plug for the glaring loopholes in our company-registration process.

The Companies and Limited Partnerships Bill, fronted by Commerce Minister Craig Foss, will prevent Vanuatu-directed, Panamanian-owned entities from registering here, but it doesn't go nearly far enough to restore confidence in New Zealand's corporate reputation or prevent future abuse.

As presently drafted, the bill will require all firms here to have a locally based “resident agent”, a curious new administrative role, or a director living here or in Australia, Singapore or Canada (considered equivalent corporate jurisdictions).

Broadly, the new law will make New Zealand's registration process as robust as those of that noted pillar of the corporate community, the Cayman Islands.

The draft bill also goes to considerable lengths to avoid any inconvenience to legitimate businesses - with less than 1 per cent of companies registered required to appoint a new director or agent.

According to a report prepared by Business, Innovation and Employment Ministry officials, of 550,000 companies presently on the register, only 5000 lack a resident agent or director.

And even those forced to find a resident agent will find the process painless. The duties - and liabilities - of agents are purely administrative, perhaps why the ministry estimates the costs to companies required to have one will run to as little as $500 a year.

The small number of companies affected, and the weak penalties for resident agents fronting dodgy firms, has justifiably raised the hackles of police and other investigatory bodies whose strong preference was to insist all Kiwi companies have a New Zealand-based director who would be both accessible and answerable for the actions of their company.

Determined criminals will find ways around whatever rules are put in place. While there remain those willing to sign forms for as little as $25 a pop to become nominee directors or resident agents, abuse will continue.

Scrapping the “resident agent” concept entirely to make local stooge nominees liable for more serious sanctions would both act as a disincentive to this sort of consensual identity theft and give police more leverage in tracing organised crime to its source.

Forcing 5000 companies to find a local director may at first glance be a stretch for our thin talent pool, but reality is likely to see the actual demand for new directors diminish dramatically. Given that a sweep of the register to cleanse it of the shells created by just one rogue shell operator saw 2600 companies purged, it's likely many of the 5000 foreign-directed companies remaining are exactly the sort of entities the bill is suppose to prevent being formed.

Other tweaks are needed and Foss will be well aware of them. A report he commissioned last month cites New Zealand's non-compliance with Financial Action Task Force recommendations and states: “The bill does not purport to give the registrar and other authorities access in a timely fashion to adequate, accurate and current information on the beneficial ownership and control of legal persons.”

If resident agents are to be maintained, requiring them to keep accurate and up-to-date records on the beneficial ownership of their companies would go some way to making their purpose more than token.

A further three pages of suggestions in the ministry report on options to improve the bill were edited out on the grounds that releasing them to Sunday Star-Times would prejudice the “free and frank expression” of public servants.

Select committee members considering the bill later this year could do worse than to read this advice in full.

The goal of the bill should not be to set the bar so high as to discourage legitimate business, but rather make New Zealand's corporate environment much harder to abuse. International organised crime can't be wiped out with this legislation, but it can be shunted off to other jurisdictions with standards as low as ours are now.

This is a case where leading the world in the ease-of-doing- business ratings comes with a booby prize.

Sunday Star Times