Openness on company ownership: the government’s response

I have a story in the Guardian today, about New Zealand’s poor record as a conduit for illicit global finance. I didn’t have space to give much detail on the government’s latest move, a register of true (“beneficial”) owners of companies. So below are some questions and answers with the relevant minister, Commerce and Consumer Affairs Minister David Clark.

Will trusts be caught by the proposed register of beneficial ownership?

There is a register of companies and a register of limited partnerships. The reforms announced mean that those registers will contain information not only about who the shareholders and directors are (as currently), but also about who the beneficial owners are. If a company or limited partnership includes a trust in its corporate chain of ownership, then the trustees of that trust (but not the settlors) may – if they meet the definition that you cite – qualify as the beneficial owners.

In practical terms, this means where a trust has any beneficial interest in a company, we will now be collecting all kinds of information we were not collecting before. The changes mean we will be able to look through those trusts where required.

By contrast, there is no register of trusts. The Law Commission recommended against creating such a register in its 2013 report. The Government accepted that advice when it passed the Trusts Act 2019.

However, it is unlikely that trust use will subvert the reforms I have announced. The reforms that led to the Trusts Act in 2019 mean that there are a lot more requirements involved in operating a trust these days. I also note that recent reforms to the Tax Administration Act 1994 require trusts that generate a taxable income to disclose a lot more information to Inland Revenue about the parties to the trust.

The Cabinet paper mentions extra funding for administering the register, but will there be extra funding for verification and enforcement?

The Cabinet minute notes that “the ongoing operating expenses to provide for a beneficial ownership register and an identifier system are estimated to be $3.4 million per annum” (rec 31). While details are still being settled, this will include an annual sum for identity verification (i.e. checking that a beneficial owner is a real person) and for enforcement (e.g. prosecuting any person who provides information to the Registrar knowing or being reckless as to whether it is accurate [rec 22]).

Will the Registrar verify that a beneficial owner is who they say they are?

The Registrar will systematically check/verify the identity of every beneficial owner (both new ones, as they register, and existing ones, in a stand-alone work programme). However, this verification will be limited to checking that the individual is a real person and that the individual communicating with the Companies Office is that same real person (and not a third party). What officials are considering is the possibility of the Registrar going further – where there are red flags – and verifying that the individual in question is in fact a beneficial owner of the company or limited partnership concerned.

There is no apparent mention of empowering any agency to actively check for failures to comply with the register or punish non-compliance (though penalties are listed). Does that not suggest the register might be relatively toothless?

The Registrar will have the power, and the funding, to enforce the new offences set out in the Cabinet minute.

Directors and shareholders will be able to apply to have their residential addresses suppressed. But what will the test be? Will requests be automatically granted, or will people have to show likely harm from publication of their address?

This will depend on whether the request concerns the display of the residential address on the entry for the company or limited partnership in question, or the inclusion of the residential address on a document that the individual uploaded at some stage in the past. In the former case, the Cabinet minute notes [rec 25.1] that directors and shareholders “can require the suppression of their residential address from the main register information if they provide an address for service” – in other words, there is no test beyond the provision of an address for service, so there is no need to show the likelihood of harm. By contrast, the Cabinet minute also notes [rec 25.2] that they “can require the Registrar to suppress their residential address from uploaded historical documents if they provide an address for service, in return for a fee, if they can demonstrate specific safety concerns.

It must be stressed, the use of a residential address has previously been a proxy for an individual identifier, but did not always work effectively, especially where someone had multiple addresses. The implementation of the unique identifier system, will make linking connected interests far more streamlined.

The 2021 Financial Action Task Force report on NZ pointed out multiple problems. In light of these issues, don't the changes announced (beneficial ownership and individual identifier) look rather inadequate?

The proposed reforms are specifically targeted towards addressing deficiencies related to the transparency of beneficial ownership of companies and limited partnerships, and will go a long way towards improving New Zealand’s compliance with the FATF standards related to this issue.