There was a flurry of media interest in November 2005 in the first ever conviction of a foreign landowner for not doing what he said that he would when he was given Overseas Investment Commission ( OIC) permission to buy land. This media interest included getting CAFCA’s point of view, and I was interviewed by TV3 News, the New Zealand Herald and National Business Review. Journalists were grateful that the only freely accessible place where they could get information about the land purchase in question was on CAFCA’s Website.

The case involved an American, Lance Weller, who was given OIC approval in 2000 to buy a block of land near Queenstown which he said that he would develop as a walnut plantation. He did no such thing, the only development being preparatory work for building a house. That never came to pass either – Weller found it much more profitable to sell the land, making a $1 million profit. The word for that is speculation.

So, for the first time ever, the OIC took one of its clients to court (the OIC is now called the Overseas Investment Office - OIO). The charge was laid under the previous 1973 Overseas Investment Act (since replaced by the 2005 version). Under that he could have been fined up to $30,000 (under the new Act, it has been increased to $300,000 and/or 12 months in prison, plus there are provisions for Court-ordered seizure of property and/or profits). Weller was fined $17,000, plus $5,000 costs. There are doubts about whether that money can be collected, as he has actually left the country, and the OIO’s feeble jurisdiction does not extend beyond NZ.

Compared to a $1 million profit, a total of $22,000 (fine and costs) is derisory, and would be dismissed as simply the minor cost of doing business. This is white collar crime, it certainly is not victimless, and until the law is enforced as written (i.e. with people going to prison), it’s no more than the proverbial slap on the wrist with a wet bus ticket. The fact that the OIO has actually prosecuted someone, anyone, is better than nothing but not by much. Let’s see a lot more action.

Foreign Investment Regime “Routinely Abused”

This case elicited some indignant correspondence in papers throughout the country, the most interesting letter being the one from Mark Dunlop, a lawyer who had worked for the OIC and was so alarmed by what he encountered that he went public with a submission opposing the Overseas Investment Bill (see the cover story in Watchdog 108, April 2005, “Former OIC Insider Strongly Critical Of Foreign Investment Regime”, Murray Horton. It can be read online at http://www.converge.org.nz/watchdog/08/01.htm). Dunlop wrote:

“…Having worked for the Overseas Investment Commission (secretariat) on investigating compliance issues, I can assure the New Zealand public, with regret, that the privilege of purchasing land in New Zealand continues to be routinely abused by many overseas ‘investors’ and that there is widespread circumvention of our overseas investment rules by those people and their New Zealand agents and advisers. In fact, working for the OIC left me in no doubt that our foreign investment regulatory regime is routinely flouted in its entirety. This, because our overseas investment rules and the ‘conflicted regulator’ which they set up, are fundamentally flawed.     

“Having drawn these issues to the attention of the Select Committee that considered the current legislation, it seems that, sadly, our Government has chosen to recklessly disregard this situation, although stronger compliance and enforcement tools are a small step in the right direction. It seems that there is even an unwillingness to implement measures to redress the dearth of statistical information on the amount and geographical spread of New Zealand properties owned by overseas people and the actual, rather than perceived, contribution of foreign land purchasers to the recent property boom and the consequences of that. Such information would at least serve to inform the often polarised debate on foreign investment in New Zealand and act as a check to ensure that our regulatory regime is pitched at the right level” (Otago Daily Times, 22/11/05, “Foreign investors abusing buying privilege, Letters To The Editor).

Meanwhile The Big Boys Laugh All The Way To The Bank

And I’m afraid this stuff pales into insignificance when compared to what goes on in the world of transnational corporations (TNCs), which is where the real action is, always has been and always will be. One of the biggest deals of 2004 was the $1.7 billion buyout of Edison Mission Energy’s ( US) 51% stake in Contact Energy by Origin Energy of Australia.

But CAFCA could find no trace of it in any of the monthly Decisions of the former OIC. So, in July 2005, we wrote and asked for the documentation. Guess what? They’d forgotten about it and only remembered when they received our inquiry, a year after the event. In September we got a letter from the OIO thanking us for waking them up and causing them to ask Origin Energy to go through the motions.

“Accordingly, Origin has now sought retrospectively a formal consent for the acquisition of the shares in Contact. The OIC/OIO was satisfied that the failure to obtain a formal consent prior to the settlement of the transaction was purely an administrative oversight and that granting a retrospective formal consent did not raise any policy implications”. That retrospective consent was given in a Decision dated August 18, 2005.

What a farce. We’ve always said that the OIC/OIO’s job could be done by a monkey with a rubber stamp. Obviously the monkey likes to have a lie down now and again and can’t be bothered with the tedium of rubberstamping. I mean, what’s $1.7 billion between friends, it’s only the electricity system after all.

The Dominion Post decided to investigate this further and elicited an admission from Annelies McClure, the OIO’s Chief Executive Officer, that the transaction was illegal for one month (July-August 2005) but she was happy to accept the explanation that it was purely an “administrative oversight. The responsible person at Origin had left the company. Asked if the sale was illegal if consent had lapsed, Ms McClure said: ‘Yes, because under our old legislation…It would have been an illegal contract…from a technical perspective’. Retrospective validation had solved that, however. The OIO was satisfied Origin had not been trying to deceive it. Origin had to pay another $1,500 fee for the retrospective consent” (Dominion Post, 7/9/05, “Origin Energy deal ‘illegal for a month’, Marta Steeman).

Good old retrospective approval has been the hardy perennial for the OIC for many a long year, and doubtless will be for the OIO. And just compare the two above cases. The individual who made a $1million profit selling his land has to pay $22,000. The TNC which illegally bought another TNC’s share of a huge chunk of the electricity industry gets retrospectively approved and, just for good measure, has to pay another $1,500 application fee. That should stop them in their tracks. This was under the old Act. It will only be worse under the 2005 Overseas Investment Act which is now in force. We won’t even necessarily know about it – any TNC takeovers of less than $100 million don’t require any sort of regulatory approval or oversight now. Ideal for administrative oversights and retrospective validations.