It is a scandal that it has taken a Government inquiry for Prime Minister John Key to finally agree to a crackdown on the obvious abuse of the NZ foreign trust regime.

Key would have known that New Zealand had a reputation as a "soft touch" in the offshore banking world.

He is smart. He is a former investment banker.

But he sat on his hands while a bunch of well-heeled trust lawyers - including his personal adviser - lobbied to maintain the status quo.


Finally, three years after the Inland Revenue Department (IRD) called for the rules to be tightened, the prime minister has pledged action.

He had no choice.

The massive leak of the Panama Papers forced the Government to commission an inquiry into NZ's foreign trust rules.

In the Panama Papers file were 11.5 million documents from law firm Mossack Fonseca which revealed foreign trusts secretly held billions of dollars for a global elite.

While we do not know the extent of the assets held in the NZ foreign trusts, there is sufficient detail to raise concerns that some "politically exposed" players were squirrelling funds away here, safe from the inquiries of their own tax authorities.

Although obviously such trusts also have legitimate uses.

Former PwC chairman John Shewan produced a robust report into NZ's foreign trust disclosure regime.

Unsurprisingly, Shewan says the existing foreign trust rules are inadequate. They are "not fit for purpose"; nor sufficient to protect NZ's reputation as a country that co-operates with other jurisdictions to counter money laundering and aggressive tax practices.

Shewan said there had been no direct evidence of illicit funds being hidden in NZ foreign trusts, nor of tax abuse. But he noted that the Panama Papers have not been released publicly by the journalists who have them and were not available to the inquiry. Based on his work and a review of Inland Revenue's files it was reasonable to conclude there are cases where foreign trusts are being used this way.

In fact, Inland Revenue would not have had to dig too far into its files to reach its conclusion.

In 2013, IRD warned that NZ's foreign trust rules continued to attract criticism, including claims that New Zealand is "now a tax haven in respect of trusts".

IRD said this was because "the mismatch between our rules and those of other countries may result in income not being taxed either in New Zealand or offshore".

"To protect our international reputation, it may be necessary to strengthen our regulatory framework for disclosure and record-keeping."

"This, in turn, raises the question of whether our foreign trust rules are sustainable."

The Government did nothing.

Pertinently, Key stood aside while even his own lawyer, trust specialist Ken Whitney, joined others lobbying against some changes to the foreign trust regime that IRD wanted. It all got too hard for then-Revenue Minister Todd McClay and the IRD ultimately re-ordered its priorities.

The upshot is that when the Panama Papers scandal finally broke New Zealand took a reputational hit which could, and should, have been avoided.

Shewan's comment that the Panama Papers were not available to the inquiry should have been tested.

While this was a relatively limited inquiry, it would surely have been a simple matter for him to go back to the two relevant Cabinet Ministers - Finance Minister Bill English and Revenue Minister Michael Woodhouse - and ask for the scope to be widened so that the papers could be subpoenaed from NZ journalists.

This is exactly what happened in the long-running "Wine Box" inquiry of the early 1990s. That inquiry revealed the extent to which an NZ-owned tax-dodge designing company had used the Cook Islands as a haven through which its clients routed dubious commercial transactions that bordered on fraud and skirted tax evasion.

Investigators from Inland Revenue and the Financial Markets Authority will undoubtedly rub up against the current rules when they seek confirmation (and documents) from NZ-based trust lawyers. Foreign trusts can be easily registered in New Zealand. There are no hard disclosure requirements which means identities can be kept secret and assets can be kept invisible.

Shewan discounts the reputational hit on New Zealand from the Panama Papers.

While it is true that there was not a great deal of international coverage, the in-depth article by AFR investigative journalist Neil Chenoweth was searing in its conclusions.

To Shewan's credit, the article is included in the report.

The dirty secret is that New Zealand lawyers and other offshore trust specialists have long been at the cutting edge of the offshore industry.

But their ability to look the other way while clients take advantage of this haven is about to get a lot tougher.