Court opens file on SFO tax fraud probe

By Deborah Hill Cone

Friday 30th July 2004

Secrecy surrounds a major Serious Fraud Office prosecution of two distinguished business figures over a tax-saving investment scheme linked to one of the country's top law firms.

A wide-ranging suppression order has been granted, blocking publication of one of the professional's identities Auckland man Mr X including details of his job, the company he works for and its clients. An arrest warrant has been issued for the other person, Mr Y, a tax-exile who has fled overseas.

The SFO has contacted British police in an attempt to extradite Mr Y, who gives a London address in Companies Office filings, to return to face a depositions hearing in November.

In response to an application from the National Business Review, Auckland District Court acting administrative judge Roderick Joyce this week granted the paper access to the court file, which shows the two men were jointly charged in November 2003 with fraud for allegedly using a document to implement a sham tax scheme.

The charge sheet alleges Mr X and Mr Y used a package of documents comprising an offer document entitled Underwritten Timber Futures: An Opportunity for New Zealand Corporates and two 1994 legal opinions on Simpson Grierson letterhead to obtain a pecuniary advantage for themselves and/or others.

The modus operandi of the forestry scheme is similar to other so-called tax-efficient investments, such as the structure surrounding Wellington firm Digi-Tech, which uses a similar template.

The forestry deal in this case involved about 50 investors buying an option to acquire a certain quantity of timber, say $1 million worth, in 10 years' time. Investors could insure against the value of the trees going down over that period by taking out an insurance policy as well as a non-recourse loan to pay for the insurance premium.

As part of the package, the deal used the tax-haven jurisdiction of Niue.

These features resulted in the investors being able to claim large upfront tax deductions although as with other similar schemes these were later disallowed by Inland Revenue.

The 10-year deadline for the timber futures contract to be enforced is approaching, although there is some confusion about whether the date for the option to be exercised will fall this year or next.

"The transaction that [the SFO] is criticising as being fraud is ripe for settlement," said Colin Carruthers QC, acting for Mr Y.

Carruthers said papers relating to the transaction held by the Niue government had been destroyed by Cyclone Heta in January, which had caused some problems.

"[They are] in a position to settle [the substantive timber transaction] but it depends on the Niue government doing its part."

All but two of the investors have accepted the commissioner of Inland Revenue's assessment that disallowed their tax deductions.

Two who are fighting the taxman's position were this month ordered in the High Court at Wellington to pay $150,000 to the court as security for costs in a move their lawyer argued was constitutionally significant. Their substantive case has yet to be heard.

Meanwhile, in his November 2003 application for identity suppression Mr X, 50, said he has a strong defence to the charges.

The judge accepted Mr X's arguments, expressed by his counsel, John Haigh QC, that unveiling his identity would have a damaging effect on his company and his elderly mother.

Last year lawyers for Mr X and his business partner had argued against the judgment granting name suppression being made public but this week Judge Joyce released the document.

Serious Fraud Office assistant director of prosecutions Gus Andree Wiltens also supported NBR's application to see the file.

Andree Wiltens said the suppression orders were interim and it was "almost a certainty" that at some stage they would be discontinued.

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