The Government has released John Shewan's independent inquiry into Foreign Trust Disclosure Rules.

Among the recommendations it makes is removal for of the regulation that excludes lawyers and accountants from anti-money laundering requirements. It says this should be done by Order in Council before 31 December 2016.

"The proposed removal of this exclusion when phase 2 of the AML regime is implemented, as announced by the Government in May 2016, will address this recommendation but may not be effective until towards the end of 2017 or later," the report says.

The AML/CFT rules and requirements are considered in Appendix 6 of the report, which notes that the exclusion of lawyers, accountants, conveyancers and real estate agents was a deliberate policy decision to allow more time for the rules to be developed.

"At a practical level the exclusion means that lawyers and accountants are generally not subject to the requirements of the AML/CFT Act. They are, however, required by the Financial Transactions Reporting Act 1996 to report any suspicious activity they detect, but the provisions are less prescriptive than under the AML/CFT Act, and there is no supervision component," it says.

The report also recommends that the AML legislation or regulations be revised to include a mandatory requirement to verify in all cases the underlying source of funds or wealth settled on a foreign trust.

The inquiry was established on 11 April 2016 in response to release of the "Panama Papers" the previous week.

Announcing the inquiry, the Finance and Revenue Ministers said that in light of the Panama Papers it was appropriate to look at whether the disclosure rules are fit for purpose and whether practical improvements could be made.

Former PWC chair John Shewan was asked to examine New Zealand's foreign trust disclosure rules and to report on whether the rules, and the enforcement of them, are sufficient to ensure New Zealand's reputation is maintained when considered alongside the country's commitment to various OECD and other international agreements.

His report concludes that the existing foreign trust disclosure rules are inadequate.

"The rules are not fit for purpose in the context of preserving New Zealand's reputation as a country that cooperates with other jurisdictions to counter money laundering and aggressive tax practices," it says.

"The Inquiry considers that a significant increase in information disclosed when a foreign trust sets up, annual reporting and increased enforcement, will satisfactorily address the issues identified. Banning foreign trusts or removing the current tax exemption is not considered to be necessary or justified."

Mr Shewan says strengthened disclosure requirements should act as a deterrent to offshore parties looking to use New Zealand foreign trusts for illicit purposes.

"The Panama Papers have not been released publicly by the journalists who have them and were not available to the Inquiry. There has been no direct evidence of illicit funds being hidden in New Zealand foreign trusts, or of tax abuse," he says.

However, based on the work undertaken, Mr Shewan says he considers it reasonable to conclude that there are cases where foreign trusts are being used in this way. Current legislation, regulations and practice governing disclosures by foreign trusts present both the potential and the environment for this to occur.

Mr Shewan makes 20 recommendations, including a requirement for foreign trusts to register on establishment, using an expanded version of the current disclosure form IR 607. A register of foreign trusts, searchable only by regulatory agencies, should be maintained, he says.

The recommendations also include revision of the legislation or regulations governing suspicious transaction reporting to the Financial Intelligence Unit of the New Zealand Police to facilitate the reporting of actual or proposed transactions that have not or will not necessarily go through a New Zealand bank.

Mr Shewan recommends a review of the current legislative arrangements for the sharing of information between IRD, Financial Intelligence Unit and the Department of Internal Affairs. He says the review could coincide with the introduction of phase 2 of the AML regime. Its purpose would be to determine the financial and efficiency gains and other implications of sharing strategic intelligence and other information between agencies.