The Government needs to change the law to prevent criminals from salting away proceeds of crime into their KiwiSaver account and then withdrawing it, a legal expert says.
The call comes after a legal attempt by police to collect a portion of fraudster Joanne Harrison's KiwiSaver funds failed in the Court of Appeal.
Harrison, who defrauded the Ministry of Transport of just over $780,000 applied to withdraw $23,000 from her KiwiSaver account under financial hardship rules in 2019.
The Police Commissioner applied to the High Court for a restraining order on the money on the grounds that it had been released from the fund so was no longer subject to section 127 - a part of the KiwiSaver law which protects the money from being paid out to anyone who is not the account holder.
A freeze on the funds was allowed due to the large amount Harrison still owed. At the time this was $238,000.
But the Court of Appeal decided there was no provision under the Criminal Proceeds Recovery Act for the Commission to put a hold on the funds because a final profit forfeiture order had already been made.
It also decided the funds were still subject to section 127 of the KiwiSaver Act despite being "cashed in" by the fund manager.
Emma Dale, a senior associate at Chapman Tripp specialising in financial services law, said the judge had indicated the law needed to be looked at in terms of the interplay between the Criminal Proceeds Recovery Act and the KiwiSaver Act.
"From a KiwiSaver perspective ... each application is judged on its merits and if the supervisor of the scheme determined it was in the members interests to pay the significant financial hardship claim and she made the criteria for the claim then they pay it out because they have got no authority to hold it.
"There is no ability under the KiwiSaver Act to earmark those funds as being something they need to look at, for bankruptcy or these cases where there is proceeds of crime - there is no ability for them to tag them and say okay well we recognise someone else has got a claim on this money - the KiwiSaver Act is very clear on that."
Dale said the issue was not urgent in terms of putting it in perspective of the Covid pandemic but she said it was something the Government needed to put on the priority list for financial services.
"It's urgent in the relevant context because you wouldn't want to encourage people to use this route, although there are checks and balances on that so I don't think it is as easy as washing through a bank account."
Dale said those looking to take money out of KiwiSaver had to meet strict criteria for financial hardship withdrawals such as not being able to meet their day to day living expenses.
"Over 65s obviously that is a lot easier but for under 65s they still have to satisfy the significant hardship criteria and if there are assets lying elsewhere that are subject to this criminal proceeds act or other assets then it might be hard to get a significant financial hardship claim made out in a KiwiSaver context because there are other assets lying around."
KiwiSaver funds can also be withdrawn for a first home but Dale said that still had criteria like using it to buy a home, and meeting the criteria of intending to live in it for 12 months.
"There is a number of different statutory declarations that you have to make in doing that."
Dale said the Court of Appeal had correctly applied the law but the law needed changing to clarify the interplay between the two acts.
It may be the Criminal Proceeds Recovery Act needed to change rather than the KiwiSaver Act, she added.
Dale was not aware of any other cases of this nature - certainly none that had been through the court.
She said Harrison may have been more familiar with using a pension scheme because of coming from the United Kingdom where the pensions have been around for longer.
"Whereas average people in New Zealand I think would, if they were minded to commit this type of fraud, might well put their money in others things - like houses because that tends to be how New Zealanders spend their money."
"I don't think it is going to cause an avalanche of issues but you wouldn't want people to use this as a vehicle - you would want Government to shut it down."
Dale said any law change should also address the issues around bankruptcy. Currently creditors of those who go bankrupt cannot touch that person's KiwiSaver money unless the bankrupt withdraws the money from KiwiSaver.
Dale said that could lead to a situation where a bankrupt had taken steps similar to Harrison by squirrelling their money away into KiwiSaver and then applying for a no asset procedure or bankruptcy. "They have got $2 million sitting in KiwiSaver and their creditors have missed out. And then they walk out of it with $2m."
Dale said changes could be made to KiwiSaver in May when the annual tax bill goes through Parliament after the Budget.
"That might be a reasonable time for the Government to consider this issue and to put into the tax bill or even mid next year if it needs to consult on it."