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OFFSHORE FINANCE COMPANIES AND THE LEGAL FRAMEWORK
Description of the legal framework governing Offshore Finance Companies (OFC)

Definition of terms:

Bank — means anyone that carries on the business of banking (Bills of Exchange Act 1908, Banking Act Repeal Act 1995 etc.)

Business of banking — means conducting current accounts for customers, where the amounts are repayable to the customer's order, and the person also either collects cheques payable to the customer or receives funds from third parties to the customer's current account (no statutory definition, common law definition, see Tyree's Banking Law in New Zealand, Second Edition, pages 69-72).

Financial institution — means someone who carries on the business of borrowing and lending money, providing financial services, or both (Reserve Bank of New Zealand Act, section 2, see also Financial Transactions Reporting Act 1996 (a more broad definition).

Security — means an equity security, a debt security, a unit in a unit trust, an interest in a superannuation scheme, a life insurance policy or a participatory security. (Securities Act 1978)

Issuer — general definition is a person who issues securities, however for the purposes of the Securities Act 1978 a special more complex definition applies, resulting in the OFC being an issuer in the general sense and and Approved Issuer under the Approved Issuer levy (AIL) scheme but not an issuer for the purposes of the Act.

Approved Issuer — means an issuer of debt securities that is approved by the IRD for the purposes of the AIL scheme.

Registered bank — means a financial institution registered by the Reserve Bank of New Zealand (may or may not be a bank under the common law definition).

The OFC is a financial institution (if it borrows and lends money or provides financial services or both), a bank (if it conducts current accounts for its customers and makes and receives payments from such accounts), and an issuer of securities (but not an issuer for the purposes of the Securities Act 1978), an Approved Issuer (for the purposes of the Approved Issuer Levy scheme), but not a registered bank.

The OFC may carry on the business of banking and provide financial services and may issue securities to the public outside New Zealand. The OFC may not use the restricted words 'bank, banker, or banking' in its name or title, and may only use them in its advertising if it also includes a disclaiming statment that the OFC is not a registered bank. The OFC may not issue debt securities to the public in New Zealand without a registered prospectus, a supervisory trustee and the use of investment statements as per the requirements of Part II of the Securities Act 1978. The OFC may not carry on the business of insurance without placing a deposit with the Public Trust in New Zealand as required by the Insurance Companies (Deposits) Act. The OFC may not carry on business as a futures dealer unless authorised by the Securities Commission. Share brokerage requires a sharebroker licence under the Sharebrokers Act 1908, however this does not apply if the sharebroker is also a bank.

OFC Entitlement to Carry on Business of Banking
Documented sources showing that unregistered banks are free to carry on the business of banking include:

1. Legislation
   Most English common law jurisdictions regulate entry into the business of banking through a Banking Act, e.g. the Banking Act 1987 in the UK and the Banking Act 1959 in Australia. However in New Zealand the Banking Act 1982 was repealed by the Banking Act Repeal Act 1995.
   
2. Regulatory authorities and official sources
   
   1. Reserve Bank of New Zealand, in an article summarising the regulatory framework for the New Zealand financial sector, prepared in consultation also with the Securities Commission and the Ministry of Economic Development: 'Unlike in many countries, where the licencing of a bank determines what the bank can do, bank registration in New Zealand does not determine the permissible activities of a bank. In most respects a non-[registered]bank financial institution can conduct banking business (including deposit-taking and lending on current account) without being a registered bank. Registration as a bank merely enables the entity to include "bank" or a derivative of that word in its name.' (Bulletin Volume 66, number 4, page 26 of the attached, or accessible at http://www.rbnz.govt.nz/research/bulletin/2002_2006/2003dec66_4mortlock.pdf ).
      
   2. Reserve Bank of New Zealand: 'We do not license the business of banking per se. Financial institutions do not have to be registered banks in order to take deposits and make loans. A financial institution can conduct the business of banking without being subject to the Reserve Bank's prudential requirements for registered banks, so long as it does not use the word "bank" in its name.' (Alan Bollard, RBNZ Governor, Financial System Regulation in New Zealand, Financial Sector Ombudsman Conference, 25 July 2003, page 5, http://www.rbnz.govt.nz/finstab/banking/supervision/0137359.pdf
      
   3. Reserve Bank of New Zealand: 'Bank registration does not involve the licencing of the business of banking or deposit taking. It is only if an institution wishes to call itself a bank that there is a requirement for it to be registered by the RBNZ. Hence non-licenced institutions are able to take deposits and conduct other aspects of the banking business in New Zealand.' (The Role of the Reserve Bank of New Zealand in Supervising the Financial System, RBNZ, March 2001,
      http://www.rbnz.govt.nz/finstab/banking/role_financialsys.pdf
      http://www.rbnz.govt.nz/finstab/banking/role_financialsys.pdf — Note: 'this paper is no longer current as some aspects of our banking supervision policy have changed.'
      
3. Commentaries:
   
   1. 'Banking business is not, however, restricted to registered banks. While registered banks' business must comprise of borrowing and lending money and/or the provision of financial services, any non-[registered]bank institution may conduct business that is traditionally regarded as banking business — such as deposit taking, the provision of credit and the offer of cheque accounts and may be regarded as a "banker" for the purposes of mutual common law rights and duties of the banker-customer relationship.' Tyree's Banking Law in New Zealand, Second Edition, pages 8-9.
      

OFC Entitlement to Borrow and Lend Money and Provide Financial Services
Documents showing that most types of financial institutions need not be registered, licenced, approved or authorised:

1. Legislation
   Various entity related legislation exists for different types of financial entities, including:
   
   1. Reserve Bank of New Zealand Act 1989 — for registered banks and their prudential supervision by the Reserve Bank of New Zealand
      
   2. Unit Trusts Act 1960 — for Unit Trusts for the regulation of Unit Trusts and requires registration of the trust deed with the District Registrar [of Companies]
      
   3. Life Insurance Act 1908 — for life insurance companies, includes requirements to make deposits with Public Trust
      
   4. Building Societies Act 1965 — requires the registration of Building Societies
      Insurance Companies' Deposits Act 1953 — requires insurance companies to make deposits with the Public Trust
      
   5. Friendly Societies and Credit Unions Act 1982 — requires the registration of Credit Unions and similar entities
      
   6. Securities Markets Act 1988 — requires the registration of stock exchanges and the authorisation of futures dealers.
      
   7. Superannuation Schemes Act 1989 — requires registration of superannuation schemes.
      
   8. Secondhand Dealers and Prawnbrokers Act 2004 — requires pawnbrokers to be licenced (other types of lenders need not have a licence, and the licencing only relates to non-objection by the Police).
      There is no requirement for companies that carry on the business of borrowing and lending money and/or providing financial services to register or obtain approval or licence if they do not want to use the word Bank in their name and do not carry on the business of insurance or pawnbrokerage.
      
      Some roles in registered or authorised entities are restricted, e.g. managers and custodians of unit trusts must be approved by the Securities Commission.
      
      Activity related legislation includes the Securities Act 1978 in relation to issue of securities to the public in New Zealand, the Credit Contracts and Consumer Finance Act 2003 in relation to consumer credit.
      
      
2. Regulatory authorities and official sources
   See Table 3 of http://www.rbnz.govt.nz/research/bulletin/2002_2006/2003dec66_4mortlock.pdf as showing that 'finance companies' are not subject to 'registration by RBNZ' 'supervision by RBNZ' or 'other registration requirement.' This table also shows that there is no 'deposit or other insurance' and no 'required actuarial assessment' 'special insolvency arrangements' or 'mandatory credit rating requirement.' For the Securities Act 1978 requirements shown in the table see below for how they do not apply to the OFC either.
   

OFC Entitlement to Issue Securities to the Public Outside New Zealand
Documents showing that securities can be offered to the public outside New Zealand by issuers incorporated, resident or carrying on business in New Zealand without Part 2 of the Securities Act, concerning requirements for registered prospectus, statutory trustee, investment statement etc. applying.

1. Legislation
   '7 Territorial Scope of Part 2
   

   Part 2 applies to securities offered to the public in New Zealand, regardless of— where any resulting allotment occurs: where the issuer is resident, incorporated, or carries on business. For the purposes of this Act, a security is offered to a person in New Zealand if an offer of that security for subscription is received by a person in New Zealand, unless the issuer demonstrates that it took all reasonable steps to ensure that members of the public in New Zealand may not accept the offer. Sections 38B and 58 (except section 58(3) and (4)) also apply to any advertisement that contains or refers to an offer of securities to the public outside New Zealand and that is distributed or to be distributed to a person outside New Zealand by,— in the case of section 38B, a person resident or having a place of business in New Zealand: in the case of section 58, a person resident or having a principal place of business in New Zealand. For the purpose of subsection (3), the definitions of advertisement and offer extend to communications or offers received by persons outside New Zealand. The territorial scope of Part 2 may be further extended under Part 5 For the avoidance of doubt, nothing in Part 2 applies to a security or an advertisement unless it applies under subsections (1) to (5).' (Securities Act 1978, Section 7) This section shows that securities offered by New Zealand issuers to the public outside New Zealand are outside the scope of the Act, and that the requirements of the Act do not apply in such cases. However criminal liability for untrue statements in prospectuses or offers of securities remains.

2. Commentaries:
   'Securities offered overseas: Nothing in Part II of the Act applies in respect of any security that is offered for subscription only to persons outside New Zealand and persons in New Zealand who can properly be regarded as having been selected otherwise than as members of the public.' Guidebook to New Zealand companies and securities law, 7th Edition, CCH, Andrew Beck and Andrew Borrowdale, page 211.
   

OFC as Approved Issuer
The OFC's status as an approved issuer will be obtained and documented in each instance, as in the example company documents above. The Approved Issuer levy (AIL) scheme enables the issuer to pay interest on registered debt securities to non-associated non-residents of New Zealand for tax purposes without disclosure to the IRD and without deduction of Non-Resident Withholding Tax (NRWT). We register Savings Account and Term Deposit as classes of securities for the purpose of the scheme for each OFC, as in the above example. Note: this scheme only applies to debt securities, equity securities are subject to NRWT and the company itself is subject to Income Tax. The issuer must pay a 2% AIL on the interest on such securities in lieu of NRWT. See http://www.ird.govt.nz/forms-guides/number/forms-300-399/ir395-guide-apprvd-issuer-levy.html for the official guide from the IRD about this scheme.