21 September, 2011

Introduction

A handful of recent announcements are set to impact on overseas-owned companies already operating or seeking to establish in New Zealand. The most newsworthy change is the much-anticipated change to the registration requirements under the Companies Act 1993. Two other changes may have some important practical implications for overseas-owned companies when dealing with their financial reporting obligations.

Change to registration requirements

A Cabinet paper released on 19 September indicates that legislation will shortly be introduced to tighten New Zealand’s company registration requirements to address threats to the integrity and reputation of New Zealand’s company registration regime. The Registrar of Companies is also to be given enhanced powers to respond to risks which might arise in relation to integrity of information on the companies register.

The objective of these proposals is to enhance the reputation of New Zealand as a place to do business. This, necessarily, involves a balancing act between maintaining processes which are economical and user-friendly and preventing abuse that could damage New Zealand’s reputation.

The release of the Cabinet paper comes 12 months after Commerce Minister Simon Power signalled the likelihood of a tightening of the rules as a response to an investigation into the affairs of SP Trading Ltd, a New Zealand-registered company that was involved in the charter of a plane intercepted at Bangkok airport with a cargo of weapons. The cargo was found to be in breach of UN Security Council sanctions prohibiting trading in weapons with North Korea.

The investigation revealed that individuals and groups, especially from overseas, are misusing the New Zealand company incorporation process. Often this was achieved by using a New Zealand-based company formation agent, who sells a package of company documents to an overseas company broker. In many cases, both the sole director and the sole shareholder are based overseas and the Cabinet paper reveals that many of the clients of the formation agent responsible for the formation of SP Trading are involved in illegal activity such as smuggling, money laundering and tax fraud.

The Reserve Bank also believes that 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 it has received frequent complaints and enquiries about offshore financial institutions incorporated in New Zealand but with no other connection to this country.

As a result, agencies such as the Inland Revenue Department are 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.

Proposed changes

The Cabinet paper proposes four major changes:

•  Appoint a local director or agent: Requiring companies to appoint at least one director or an agent who is ordinarily resident in New Zealand. This is in keeping with the requirement in a number of comparable overseas jurisdictions – and includes a proposal for a limited exemption for companies with a director in an approved overseas jurisdiction (such as Australia). The Cabinet paper notes that, in the case of an agent, care will need to be undertaken to ensure that the agent’s duties (accepting service of proceedings and ensuring that the company meets its disclosure obligations) are administrative in nature and not de facto directors’ duties¹.
  
  
• Requiring directors to supply date and place of birth information: In keeping with the supply of similar information in conjunction with registration of limited partnerships, this information would only be available to the Registrar and would not be publicly available.
  
  
• Requiring all companies to apply for an IRD number: This is intended as an additional verification step as well as reducing compliance costs (as the same information would not be required twice). About 80% of new company registrations already opt to provide an IRD number.
  
  
• Enhancing the Registrar’s ability to investigate issues arising from registration applications: New powers would be provided in regard to the bona fides of directors and shareholders and any integrity or compliance issues relating to company registration. These include power to:

• require companies, directors, shareholders and/or local agents to confirm or correct existing information on the companies register;
  
  
• raise a ‘flag’ on the Companies Office website noting that certain matters relating to a company’s registration or filings were under investigation;
  
  
• remove a company from the register for failure to remedy ‘flagging’ issues;
  
  
• remove a director where that person was disqualified from being a director – leaving a company at risk of being ‘flagged’ and ultimately removed from the register as well as making it more difficult for ‘suspect’ companies to find local directors (or agents). The Cabinet paper also refers to further work being done on the issue of directors with banning orders in other countries; and
  
  
• imposing management banning orders on directors and local agents for persistent non-compliance with the disclosure and reporting obligations under the Companies Act or the Financial Reporting Act 1993 or for providing inaccurate information to the Registrar.

Limited partnerships

The Cabinet paper also notes that the concerns about the registration process extend to the registration of limited partnerships. Specifically, since the inception of the limited partnerships regime, officials have noticed a high uptake by offshore businesses which carry on no business in New Zealand.

Further measures

Also noted is that further measures are being considered to address other issues related to abuse of New Zealand corporate structures by offshore interests including as a knock-on impact of tightened anti money-laundering regulation and that these might include:

•  regulation or prohibition of nominee directors;
  
•  recording the beneficial ownership of companies;
  
•  measures concerning open-ended powers of attorney;
  
•  identification and verification of the identity of directors and shareholders (e.g. a unique identifier such as a passport number);
  
•  dealing with the issues of "shell" financial institutions; and
  
•  regulation of company formation agents by including them as ‘reporting entities’ under tightened anti money-laundering regulation.

Simplified financial reporting proposals

The release of the Cabinet paper comes only a matter of days after the announcement of proposals to simplify the financial reporting framework for SMEs and registered charities. The proposed reforms follow on from a review of the financial reporting framework which found that the framework was overly costly and not meeting users’ needs or expectations.

Amongst the proposals, is a reduction in the filing obligations for overseas-owned companies. At present, most overseas companies that carry on business in New Zealand are required to file annual financial reports with the Registrar of Companies. Under the proposed changes, this will only be required if the company is "large" (i.e. revenue of $30 million or more or assets of $60 million or more).

Amending legislation is expected to be introduced next year.

Also, a recent exemption notice² has reduced the compliance burden of companies incorporated in Australia that are ‘issuers’ for the purposes of the Financial Reporting Act 1993 in respect of ongoing financial reporting requirements. In particular, the registration of consolidated financial statements for the group and summary information on the parent entity that comply with the preparation and audit requirements of Australia will be permitted.

This change comes about because full separate parent entity financial statements are no longer required under Australian law. Also, the Financial Markets Authority considers that the financial reporting obligations under the laws of Australia will provide New Zealand investors with adequate financial information about companies in which they invest (and that Australia has adequate regulatory and enforcement mechanisms).

Further Information

For further information please contact any member of Hesketh Henry’s Corporate & Commercial team.

[1] It is noted that the agent alternatives are described as taking longer to implement and being the subject of reservations by a number of public sector agencies – who consider that minimal accountability and liability on the part of an agent are unlikely to provide the necessary deterrent effect.

[2] The Financial Reporting Act (Australian Parent Entity Financial Statements) Exemption Notice 2011.