The Government is concerned that individuals and groups are using New Zealand companies to conduct criminal activity from overseas which threatens New Zealand's international reputation. Changes to the New Zealand company registration process are one step closer, following the recent release (on 19 September) of a Cabinet paper.

Click here to access the Cabinet paper on the Ministry of Economic Development's website.

What Changes are Proposed?

The Cabinet paper outlines four broad groups of proposals aimed at strengthening New Zealand's company registration process. The proposed changes:

  • require all New Zealand companies to have at least one director or agent who is ordinarily resident in New Zealand;
  • require all directors to supply date and place of birth information;
  • require all companies to apply for an IRD number as part of the company registration process; and
  • strengthen the Registrar of Companies' powers to respond to risks in relation to the integrity of information recorded on the companies' register.

The Cabinet paper maintains that these proposals are not radical measures, but will bring New Zealand's company law more into line with similar jurisdictions (including Australia, Singapore and Canada).

The proposed new powers for the Registrar of Companies are particularly noteworthy. These powers will allow the Registrar to:

  • require a person to confirm or correct existing information on the companies' register;
  • issue a "flag" on a company's record on the Companies Office website to show the company is under investigation;
  • remove a company from the companies' register on new grounds, including where the Registrar has a reasonable belief that inaccurate information has been provided or where the company is in persistent breach of the Companies Act 1993 or Financial Reporting Act 1993; and
  • remove or ban a person (including a director, a local agent or a person involved in the management of a company) from being registered and/or holding that appointment, if that person is disqualified or persistently breaches his or her obligations under the Companies Act or Financial Reporting Act.

The proposed changes (with necessary modifications) will also apply to New Zealand's limited partnerships regime.

Will Compliance Costs Increase?

For New Zealand-based companies, the proposals are likely to impose relatively low compliance costs. These companies will already have a New Zealand-resident director and an IRD number. The only new requirement for these companies will be the need to supply birth information for their directors.

For companies with offshore directors, there are likely to be some additional costs through the requirement for a New Zealand-resident director or agent. An exemption is proposed for directors residing in approved overseas jurisdictions which have reciprocal enforcement or information-sharing agreements with New Zealand (eg Australia). This should minimise costs for some offshore companies.

Why is Change Necessary?

The Government is concerned that individuals and groups are misusing New Zealand's simple company incorporation process to establish companies to conduct criminal activity from overseas. This has been highlighted by a recent, high-profile example where a New Zealand incorporated company, controlled from overseas, chartered a plane used for weapons trafficking in defiance of UN sanctions.[1]

The Reserve Bank has similar concerns regarding approximately 1,000 shell companies that have been registered in New Zealand and used to carry on banking activities without the necessary regulatory controls, with many suspected of being engaged in fraudulent activities.

New Zealand's company registration process is low-cost and straightforward, compared to other jurisdictions. The registration process contributes to New Zealand's well-regarded reputation for ease of doing business, a comparative advantage for New Zealand in attracting and retaining foreign investment. However, there is now a perceived risk that New Zealand's incorporation process is being used to provide a "veneer of legitimacy" for international criminals to facilitate their unlawful conduct.

The proposed changes are intended to address these concerns. They are a subset of more substantive government policy work on the abuse of New Zealand's wider corporate structure and associated anti-money laundering reforms. That policy work requires greater consultation, and is progressing on a slower timeframe.

When will the Changes be Effective?

The proposed changes need to be included in amending legislation to be presented to Parliament. It is unclear whether this will occur prior to the upcoming general election; Parliament's last sitting day before the election is 6 October.

What other Changes are Possible?

The Government is reviewing further options to resolve wider issues surrounding the abuse of the New Zealand corporate structure by offshore criminal interests. Mechanisms are being considered to:

  • regulate or prohibit the use of nominee directors;
  • record the beneficial ownership of companies;
  • address the use of open-ended powers of attorney;
  • strengthen the verification and identification of directors and shareholders (possibly through a unique identifier such as a passport number);
  • deal with issues regarding shell financial institutions; and
  • regulate the use of formation agents (with a view to including them within the scope of anti-money laundering legislation).

We will monitor developments of this wider policy work, and comment further when updates are available.