What's the New Zealand link to the Panama Papers?

New details from the Panama Papers show how a stream of foreign cash became a torrent flooding into New Zealand trusts in order to avoid tax offshore.

Documents obtained by the Australian Financial Review show:

A Mexican construction tycoon dubbed the 'Duke of Influence' joined a rush of foreign money into tax-free New Zealand trusts.

Juan Armando Hinojosa Cantu, who built his fortune from billions of dollars in Mexican government contracts, was investigated for lavish housing deals with Mexican political figures.

On July 1 last year, Cantu's Miami lawyer said his client had "circa $US100 million" to put into three New Zealand trusts.

Maltese investors who had been turned away from nine banks in the Caribbean, Miami and Panama eventually found a home for their money in New Zealand trusts.

Demand for New Zealand trusts went into overdrive late last year with Mossack Fonseca staff in Panama urging New Zealand staff to "chase the money".

HANNIBAL HANSCHKE/REUTERS Hinojosa Cantu built a US$7 million house for the TV star wife of President Enrique Peña Nieto (pictured). Angélica Rivera paid only 30 per cent of the price with the rest covered as promissory note.

On July 1 last year, opportunity came knocking for Panamanian law firm Mossack Fonseca: they had a new client—and a big one—ready to push $100 million into the tax-free obscurity of some New Zealand foreign trusts.

That figure was just for starters, the client's Miami lawyer promised, "only a small part of the client's portfolio".

The client, Juan Armando Hinojosa Cantu, was one of Mexico's construction tycoons. But there was a problem.

Construction tycoon Juan Armando Hinojosa Cantu has been the subject of huge controversy in his native Mexico.

In fact there was a problem with a string of Mossack Fonseca's clients who were coming to New Zealand, as prime minister John Key's government has discovered, thanks to a global investigation led by the International Consortium of Investigative Journalists based on 11.5 million Mossack Fonseca documents obtained by Süddeutsche Zeitung.

READ MORE:

* New measures to combat cybercrime outlined by Government

* Prime Minister John Key's lawyer asked about foreign trusts

* NZ trusts at the centre of Malta money scandal

* Government now says NZ trust examination likely

* More NZ links to Panama Papers to come

* Q&A: Panama Papers' fallout has only just begun

The rolling controversy in New Zealand triggered by the Panama Papers has focused on just one Mossack Fonseca client - an Argentinian family behind a sensitive New Zealand land purchase.

CARLOS JASSO/REUTERS More than 11.5 million financial and legal records from Mossack Fonseca were leaked.

New documents obtained by The Australian Financial Review challenge parts of the government's account of the sale, as well as revealing other deals with a cast of controversial players ranging from senior members of the government of Malta to Panama lawyer with an outstanding arrest warrant in Brazil on money laundering charges.

And then there was Hinojosa Cantu's little problem.

"Unfortunately due to his success and high profile, he has quite a number of people who greatly dislike him and unfortunately there is a great deal of negative publicity surrounding the client," Hinojosa Cantu's Miami lawyer, Filipe Miguel Fernandes de Matos Marcelo, wrote in an email to Mossack Fonseca on July 1, reported in the Mexican news site Proceso.

CARLOS JASSO/REUTERS The leaks emerged from Panamian law firm law firm Mossack Fonseca, which was co-founded by Ramon Fonseca (pictured).

Hinojosa Cantu, who had built his fortune from billions of dollars in government contracts, was under investigation for influence-peddling. In Mexico they called him the Duke of Privilege.

On February 3, 2015 Mexico's president, Enrique Peña Nieto, had called an inquiry after media revelations that Hinojosa Cantu built a US$7 million home for Nieto's wife, and sold another house to the Finance Minister, Luis Videgaray Caso, just before they won government in 2012.

By March last year Hinojosa Cantu had begun restructuring his finances. The key would be New Zealand.

KEN WHITNEY'S LETTER

Hinojosa Cantu wasn't the only Mossack Fonseca client heading for Auckland.

The ICIJ on Monday will release the names and shareholders of 240,000 corporate entities (and their shareholders) administered by Mossack Fonseca in more than 20 low-tax jurisdictions around the world.

The data includes 368 shareholders with New Zealand addresses, but 189 of the shareholders are trusts and another 12 companies have bearer shares, which will prove hard to track.

Mossack Fonseca were outsiders in New Zealand's outbound market—locals investing overseas—but they were well known.

In January 2009 when law firm Cone Marshall was seeking accreditation with Mossack Fonseca, Ken Whitney, of Ross & Whitney, provided a professional reference.

Unusually for a professional reference in the Panama Papers files, Whitney, whose clients include Prime Minister John Key, did not address it To Whom It May Concern. He was able to cite the street address of Mossack Fonseca's Compliance Department.

"We write to confirm that Cone Marshall is a reputable firm of solicitors practising in Auckland, New Zealand and we have dealt with them for many years," he wrote on Ross & Whitney letterhead.

"We are also happy to give a verbal reference if required," Whitney wrote.

BEHIND THE CEOL & MUIR DEAL

The Overseas Investment Office has found itself having to defend its decision to approve the $6 million sale of sensitive waterfront farmland near Auckland to another company set up by Mossack Fonseca called Ceol & Muir Inc.

Media reports in 2013 said the buyers of Onetai Station were Austrian. When the OIO approved the sale in February 2014 the buyers were described as 50 per cent Argentinian and 50 per cent Italian.

In a statement last week the OIO said it was satisfied that due process had been followed in assessing the sale.

"Regardless of what ownership structure an investor uses, the OIO looks closely at the bona fides of the people who will control the investment, who in this case were Rafael and Federico Grozovsky," the OIO said.

"Rafael Grozovsky is a citizen of Italy and his brother Federico Grozovsky is a citizen of Argentina."

This week the OIO apologised for not informing Land Information Minister Louise Upston that the Grozovskys had been involved in a pollution incident in Argentina and announced that it was appointing "a dedicated and experienced person to undertake all the web searches for information to inform the good character test".

The Panama Papers suggest that Google searches have their limits, as a government assessment procedure.

The files show that Mossack Fonseca's Uruguay office was contacted on July 3 2013 by a Uruguay law firm and asked to set up a Panama company called Ceol & Muir, with MossFon staff serving as nominal directors.

On August 7, the directors of the newly minted Ceol & Muir Inc were asked to provide a power of attorney for Rafael and Federico Grozovsky, who operate Magromer, a major textile company in Argentina.

It was founded in 1929 by León Grozovsky, who moved to Argentina from Minsk, Belarus.

ID cards provided to Mossack Fonseca on August 15 2013 show both brothers as Argentinian nationals with no suggestion of Italian citizenship or link to Italy.

It may be that Rafael Grozovsky holds dual nationality. It's not clear why two brothers in Argentina would use the Uruguay office of Mossack Fonseca to set up a Panama company to invest in New Zealand, but there are tax considerations if Argentinians do not hold a majority share.

It's difficult to know who owns Ceol & Muir because the company has no share registry.

On July 17 2013 the Uruguay law firm acting for the ultimate clients instructed Mossack Fonseca that Ceol & Muir should issue 100 shares, but only as bearer shares.

Bearer shares are certificates, pieces of paper which provide ownership to whoever physically holds that paper at any given moment.

Ceol & Muir's bearer shares would be in seven certificates each with 10 shares, and six certificates with 5 shares, a division that suggests it was already intended for there to be multiple owners—perhaps other family members.

The feature of bearer shares is that because there is no record of who holds them, there is no direct evidence of who the shareholders are at this moment—or indeed, who will hold them in five minutes time.

It appears that the Grozovsky brothers have given an affidavit to the OIO that they hold all the Ceol & Muir shares. What is unclear is whether they gave an assurance to keep hold of those shares or inform the OIO before transferring them. but such commitments may be impossible to verify in the long term.

CASHING IN ON NEW ZEALAND'S REPUTATION

In 2013 Mossack Fonseca had been on a marketing drive, cutting its prices to build up its New Zealand office.

"Chase the money," head office in Panama urged its New Zealand staff.

Mossack Fonseca offered two New Zealand products to its overseas clients: an NZ foreign trust, and a Look Through Company (LTC).

As long as the trust and the LTC had no income in New Zealand and had no New Zealand beneficiaries, then they paid no New Zealand tax.

But there was another advantage because technically the LTC was taxed, it's just that the tax rate was set at zero.

One French investor who moved his holding company from Luxembourg to a New Zealand LTC knew he would pay no tax.

But New Zealand has a double-tax treaty with France, which meant that he could repatriate the profit to France where it was not taxable because it had already been "taxed" in New Zealand.

While New Zealand's tax laws are a major plus for foreign investors, it's not the only attraction. They also come to use New Zealand's good reputation.

Under the Know Your Country protocol that banks use for part of their probity checks, New Zealand has a Transparency International Corruption Index rating of 88.

Australia's rating is 79, while Panama's is 39 and Colombia is 37.

Funds from a New Zealand company or trust is regarded as far more reputable than from most South American countries even though those same funds will never actually come near New Zealand.

By late last year the stream of South American clients setting up New Zealand trusts to channel their money had become a torrent.

It provided a challenge for Mossack Fonseca's compliance procedures.

THE MEDELLIN ENTREPRENEURS

One client was linked to a Colombian company called Fly North, that provides surveying and aerial photography. In January 2014 Mossack Fonseca set up Fly North New Zealand Ltd, a name which sounded like it was a local operation, but it was an LTC, which means it couldn't work in New Zealand.

It was a New Zealand lawyer that picked up a problem. One of the three shareholders, Fernando Cardenas Echeverri, born in 1964, supplied a copy of a Colombian passport issued in 2007 by the Consul General in Sao Paolo.

The copy of the passport, which was certified by a Mossack Fonseca lawyer in Panama, spelt Echeverri's name with three Rs. He was Echeverrri.

He had apparently been using the passport for six years without realised it was in the wrong name.

A copy of a new passport was promptly supplied, also certified by the lawyer in Panama, but Mossack Fonseca had difficulty extracting documents to show where the three shareholders lived for the Know Your Customer rules.

"Probably you may presume that our client does not want to meet your KYC requirements," one Mossack Fonseca officer wrote to a New Zealand lawyer on January 30 2014.

The difficulty was "they do not have services registered under their name because they are young people that still live with their parents; they are from Medellin and have earned an Entrepreneurs award and are making their efforts to achieve their goals".

The world of aerial photography does not always fly smoothly. By December 2014 the entrepreneurs from Medellin had fallen out with their associates in Miami, at Fly North Florida LLC, who now threatened to sue Mossack Fonseca.

Yes there had been recent disputes between Medellin and their associates in Miami, Mossack Fonseca's clients conceded, but they were sure this had all been worked out.

WAVE OF SOUTH AMERICAN MONEY

Other clients came to Mossack Fonseca New Zealand in a steady stream.

Andres Cadea Venegas, a Mickinsey & Co director in Bogota set up the Adamantium Trust to hold his company Buckingham Investors SA with a $US5 million a year income.

The family of Mexican film producer Marcos Tonatiuh Rodriguez Vega filed documents to set up the Qualcom Trust, complete with Vega's 2013 will and a statement that began, "a few weeks ago I was diagnosed with pancreatic cancer".

Samuel Jaramillo Restrepo, 80, the head of Colombian used car sales company Ultracar, set up the Arca Trust.

Hernando Lopez Jimenez, who runs the big Autonal Group car dealership and is a director of Colombia's Board of Foreign Trade, set up Olympus Trust to house his Panama company.

The list runs on and on. Setting up a New Zealand trust ensured secrecy and tax advantages but it was not necessarily illegal. There are many legitimate reasons to use such services.

GUATEMALA ALERT

Mossack Fonseca New Zealand was also picking up controversial clients.

The first hint of problems came on the other side of the world, in Guatemala, on May 29 last year.

A routine check by Mossack Fonseca's compliance division on a Panama company, Castle Hill Enterprises SA, pulled up an alert.

One of the directors, Carlos Alberto Gonzalez Campo Mencos, was requesting a power of attorney to operate the company accounts in Guatelama where it held property investments.

But Campo was no ordinary client. He was vice president of the Board of the National Electrification Institute and representative of the Ministry of Energy and Mines. He was a government figure, a Politically Exposed Person, as they are called in offshore banking circles.

"I confirm that it is the same person," the MossFon compliance officer emailed on May 29 last year, ordering a full-scale Enhanced Due Diligence profile of Campo.

One of Campo's fellow director on Castle Hill was a familiar name. Juan Armando Hinojosa Cantu was already making headlines for his close relations with political figures in Mexico and here he was in business with another PEP—prudence might suggest taking a closer look.

When queried Mossack Fonseca Compliance said not to query Hinojosa Cantu's position.

MALTA AND THE BANKING ODYSSEY

In New Zealand meanwhile Mossack Fonseca was facing two more PEPs.

On May 16 Karl Cini from Nexia BT in Malta said his clients were finally ready to move on long-held plans to link two New Zealand trust to two Panama companies.

The clients were Keith Schembri, who was chief of staff to Malta's prime minister, Joseph Muscat; and Energy Minister Konrad Mizzi.

It would take five months of prodding before the two men revealed they planned to use the structure for investments with others in recycling and online gaming.

There then followed increasingly desperate attempts to open up a bank account for the pair's Panama companies. Mossack Fonseca tried nine banks in the Caribbean, Miami and Panama, which were thought most likely to take the Maltese money.

It came to resemble a Homeric quest, an endless odyssey to find a safe haven. All nine banks turned Schembri and Mizzi's companies down because they were PEPs.

In New Zealand the due diligence process took months but in the end they had no such problem.

HINOJOSA CANTU'S PUBLICITY PROBLEM

​Hinojosa Cantu was a different sort of challenge. On July 1 last year his Miami lawyer said he had "circa $US100 million" to put into new structures based around three New Zealand trusts but mentioned the "negative publicity".

Mossack Fonseca Compliance in Panama did a lightning due diligence and reported by 3.30 that same afternoon that "no negative results were observed".

Like the NZ Overseas Investment Office, they might have done better consulting Mr Google.

In November 2014 Mexican online news site Aristegui Noticias had revealed how Hinojosa Cantu had built a $US7 million house for President Nieto's wife, television actress Angélica Rivera, who paid 30 per cent of the price with the rest as promissory note in 2012.

The Wall Street Journal reported that weeks before Luis Videgaray Caso was appointed Finance Minister on December 1 2012, he bought a house from a Hinojosa company for $US581,000, with the help of $532,000 vendor loan.

Both Rivera and Videray both strenuously denied anything improper in the deals which were before they won government and stressed the loans would be repaid.

"There was no conflict of interest. I did the deal when I was not holding public office, and the deal was within market parameters," Videgaray said.

The president's office said Nieto didn't disclose details of the house because his wife wasn't a public servant.

Nieto said he had not declared the house as it was his wife's private investment.

But public pressure continued until February 3 when Nieto promoted a public servant, Virgilio Andrade Martinez as head of the Civil Service, with his first job to investigate conflicts of interest in the house sales to Videray and Rivera.

On August 21 Andrade would report there was no conflict of interest, though he previously had conceded that as the deals were done before Nieto and Videray won office he had no power to call for copies of the sale contracts.

Hinojosa Cantu made no public comment but he had not been idle. His lawyer, de Matos Marcelo, laid out the strategy to Mossack Fonseca on July 1.

THE NEW ZEALAND STRATEGY

​On March 20 Hinojosa had gifted his shares in five offshore companies to his mother. He gave other interests to his mother-in-law.

In turn they would gift these interests, worth $50 million, to three Limited Liability Partnerships (LLPs) in England.

Three Dutch stichtings (also known as foundations) would have a 0.1 per cent share of the partnerships, with 99.9 per cent of the partnerships owned by three New Zealand trusts with old Inca names: Huiracocha, Huanca and Khuno trusts.

The chief beneficiary of the two main trusts was Hinojosa Cantu. It was all coming back to him.

Surprisingly, when the deeds for the three New Zealand trusts were signed with Mossack's Orion Trust as the trustee, they were dated April 27, more than two months before Mossack Fonseca was told about the deal.

In a pointed email to Hinojosa's lawyer on August 3, Mossack New Zealand prodded for missing documents, noting that New Zealand trusts had to be filed with authorities within 30 days of signing the deeds, "and both contracts were dated April 27, 2015".

A New Zealand lawyer told the Financial Review a trust deed only comes into effect on the date that the trust property is given to the trustee to hold, not when a trust deed is signed.

Meanwhile the New Zealand office had questions. How did Hinojosa Cantu explain all the adverse media about his relationship with the Mexican president, they asked on September 30?

Hinojosa's lawyer explained it as business rivalry from Carlos Slim, the Mexican billionaire who holds shares in The New York Times, which had also covered the story.

"There is indeed adverse information regarding the beneficiary in newspapers (many of these newspapers are owned by some business rivals such as the NY Times Slim). All allegations regarding any conflict of interest were investigated last month and was exonerated by [Andrade] of all allegations."

ARREST WARRANT

By the end of November, as the demand for New Zealand trusts went into overdrive, with prime minster Key in Malta for the Commonwealth Heads of Government, unaware of the struggles to open a bank account for Schembri and Mizzi's Panama and New Zealand holdings, and Hinojosa Cantu began steps to set up even more New Zealand trusts, there was one more problem looming.

Ruben Goldberg Javkin, the former head of the Republic National Bank of Mexico, was reorganising his offshore holdings, which he controlled through his NZ Midtown Trust.

Through November and December he was arranging for five people to be authorised to open a bank account for his new British Virgin Islands company, Schofield Company Global Limited—and the board approval was to be backdated, his intermediary requested.

One of the five was a Panamanian lawyer, Edison Teano Ernesto Rivera

An unfortunate choice. In January Rivera was targeted in Operation Triple X, a huge Brazil investigation linked to the Petrobras bribery scandal.

On January 29, Brazil's Justice Department issued an arrest warrant for Rivera on money laundering charges.

Mossack Fonseca has denied any part in money laundering and there is no suggestion that Goldberg was involved.

But it's another scandal that tarnishes New Zealand's reputation.

Despite Mossack Fonseca's size elsewhere in the world, it remains a minor player in New Zealand, its files merely an indication of what may be taking place on a much larger scale with bigger operators.

New Zealand's readiness not to tax foreign income of its 12,000-odd foreign trusts is not philanthropy. Its thriving trust sector does well enough out of the exchange from the fees it charges.

The question, given the damage such controversies may inflict on New Zealand's name and its reputation for probity and transparency, is whether the exchange is worth the cost.

This story was first published by the Australian Financial Review