It is reasonable to conclude there are illicit funds in New Zealand-held foreign trusts, says revenue minister Michael Woodhouse.
An inquiry led by tax expert John Shewan has found "inadequate" rules surrounding foreign trusts, with the government given a number of recommendations to strengthen the industry. The government has signalled it would adopt the majority of the 20 recommendations.
Speaking to Morning Report today, Mr Woodhouse said the government was right at the time of the disclosures made in the Panama Papers to say New Zealand had full disclosure of trusts, because the IRD provided information when it was asked.
"These are foreign trusts set up by people offshore, with accounts and trading that takes place beyond the reach of the IRD. What the Shewan report has said that we have a strong reputation for sharing of information, but we can't rule out the possibility that these vehicles are being used for illicit means."
He said work on changes was stopped in 2013 because of other priorities, but the government would now beef up the rules on disclosure.
Mr Shewan - the veteran of the accounting and audit sector - told Morning Report today that the potentially illegal activity could have continued without his proposed changes.
He said the current rules were inadequate.
"It's a reasonable assumption that people can make, that if they set the trust up in New Zealand, they probably won't have any meaningful contact with regulators. For those who do like to be under the radar screen, and I stress that probably most do not, but for those that do want to try and rort the system, the conclusion I have reached is that the opportunity is there to do that."
He said at the moment New Zealand was an attractive destination to hide illegal money.
"If people have got illegal funds, this would not be a bad place to house them. And indeed some of the advertisements on websites about coming to New Zealand make that point, that the rules are...very little disclosure."
Prime Minister John Key has been adamant since the Panama Papers first became public that there is full disclosure surrounding the country's foreign trusts.
He denied the inquiry contradicted assurances he had been giving.
"I basically said New Zealand is not a tax haven. Well he [John Shewan] agrees with that perspective. I said there is full disclosure of information, there is when it's asked for," Mr Key said.
One recommendation is to establish a register of foreign trusts that the regulators here would be able to search.
Another would give Inland Revenue more information about them, including the people who have set up and control them.
Mr Shewan said he expected the number of foreign trusts to fall if the government adopted his recommendations.
United Future leader and former revenue minister Peter Dunne agreed, and said there had been an explosion in the number of foreign trusts in this country over the last few years.
"While many I suspect are perfectly legitimate, there will be as [John] Shewan observes in the report, some who will be doing it for a less than legitimate reasons, either to hide income, to avoid liability in other countries or to launder money," Mr Dunne said.
"I think a disclosure regime along the lines that he suggested will certainly smoke those out and get rid of them."
Labour's finance spokesperson, Grant Robertson, said the inquiry would force the government, which had been reluctant to confront the issue, to take action.
"The Prime Minister from day one sought to protect the foreign trust industry rather than New Zealand's reputation," he said.
Labour leader Andrew Little told Morning Report today the current recommendations did not go far enough.
"The vast bulk of these 12,000 foreign trusts are run by incredibly wealthy and incredibly powerful people. And I don't know why we feel the need to do them any favours and to assist them to avoid their tax responsibilities."
Mr Little said there was no reason foreign trusts could not be taxed here.
New Zealand First leader Winston Peters said Mr Shewan lacked the power to expose what was really going on.
"What it says is what we already know that we had a cavalier system with respect to the non-transparency of practices which led to a massive build up of foreign trusts in New Zealand," he said.
"There was a huge surge of applications because we were a soft touch. We were like the Cayman Islands."
But Green Party co-leader James Shaw said the inquiry was a victory for transparency.
"It probably means that there will be some sectors of the foreign trust industry that will simply have to close down because they are serving people who do want to hide their activities, or do want to avoid paying tax, or are hiding criminal activities. But that's not a bad thing," he said.
The government is expected to make a formal response to the inquiry next month.