Freeports – a Brexit boon or an invitation to money launderers?

While Brexit uncertainty is now set to drag on well into the fall, some British politicians are trying to figure out how to turn the country’s eventual exit from the EU to their advantage. In particular, Tees Valley Mayor Ben Houchen has argued that his constituency could benefit from hosting the UK’s first freeport.

Houchen insists that founding a freeport—a type of tax-free zone— in the Tees Valley could revitalise one of Britain’s most neglected industrial areas. But would it really help? In fact, concerns have been steadily mounting that such freeports are actually more often than not exploited for illegal practices, including tax evasion and money laundering.

One such freeport in Luxembourg has particularly raised red flags for European policymakers, who have been alarmed by the ability of freeports to enable money laundering and circumvent transparency rules. For Tees Valley then, the risks could far outweigh the potential benefits of introducing freeports into post-Brexit Britain.

Too good to be true?

Since a major steelworks closed, Teesside communities have struggled to stay afloat amidst local unemployment nearly double the national average. Houchen hopes that a freeport could turn things around, converting the area into a thriving hub of economic activity. The plan’s supporters claim it will boost regional coffers by £600 million and bring 40,000 new jobs to the area by 2040— but not everyone is convinced.

Critics have pointed out that offering tax breaks in one isolated area is likely to sap domestic investment and employment from other regions. Meanwhile, other commentators have pointed out that the introduction of freeports works best in agrarian countries with closed economies, which is not Britain’s case. By far the biggest concern surrounding the prospect of a Teesside freeport, however, is its potential to facilitate corruption and attract unsavoury characters—as has been showcased by other similar facilities.

A magnet for murky dealings

Freeports were initially intended to spare goods from being taxed while in transit, but have morphed into ultra-secure warehouses allowing wealthy individuals to store their assets nearly indefinitely– while circumventing taxation. Freeports’ staggering lack of transparency has prompted fears that they could be exploited to house illegally-obtained artefacts and to fund illicit activities and militant organisations.

The publication of the Panama Papers led to the discovery of an unaccounted-for Modigliani painting in Geneva’s freeport, which was seized in April 2016. That followed another scandal in 2014, in which €9 million in stolen antiquities were found on the same premises. More recent investigations have exacerbated these concerns: a 2016 UNESCO report and a 2018 study by the European Parliamentary Research Service (EPRS) both concluded freeports were “high risk” for illegal activity. A recent investigation by a top French outlet “Paris Match” pointed out to freeports in Geneva and Singapore as  places used to store many of the antiquities stolen by ISIS from Iraq and Syria museums. According to expert estimations ISIS has made between $4 and $7 billion from its illegal antiquities trade.

Le Freeport under fire

The controversy surrounding freeports has reached such a fever pitch that many European policymakers are calling for the bloc to ban the facilities altogether. German MEP Wolf Klinz appealed to Jean-Claude Juncker, telling the European Commission President that he is “morally and ethically obliged” to crack down on the illicit activities inside freeports’ hyper-secure vaults. Luxembourg’s Le Freeport facility, founded during Juncker’s premiership of the Grand Duchy, has been held up as a particularly troubling example given the dubious reputations its management enjoys. Founder and so-called “freeport king”, art dealer Yves Bouvier is being sued by a number of his former clients around the world for alleged art fraud worth over $1 billion. He is being investigated in Switzerland for tax evasion. Moreover, Bouvier was involved in the notorious case of Wolfgang Beltracchi, a German forger who was convicted in 2011 of having defrauded a number of collectors. Other Le Freeport’s  shareholders Olivier Thomas and Jean-Marc Peretti stand accused of stealing artwork and having links to Corsican organised crime, respectively.

A group of MEPs’ visit to Bouvier’s Luxembourg bolt-hole hardly restored their confidence. Austrian MEP Evelyn Regner described the facility as a “black hole”. Portugal’s Ana Gomes, meanwhile, described to the BBC the “extremely perfunctory” controls she witnessed at Le Freeport Luxembourg, and called the free zone “a way that could be easily used to store goods away from anybody’s control, for putting them in the dark when it’s more convenient, avoiding tax”.

Worrying links to Azerbaijani laundromat

Indeed, sometimes it seems that there is no end to the troubling ties between freeports and criminal enterprises. Le Freeport is under fresh scrutiny after it emerged that the facility’s CEO and staunch defender, Philippe Dauvergne, has links to individuals involved in the notorious Azerbaijani laundromat. The scandal saw billions of euros laundered through shell companies and offshore institutions— some of which was used to bribe European politicians to whitewash Azerbaijan’s human rights.

An article published in Forbes recently outlined Philippe Dauvergne’s decade-long relationship with Azeri businessman Khagani Bashirov, himself connected to one of the key figures in the international money laundering scheme, former chairman of International Bank of Azerbaijan Jahangir Hajiev (who was sentenced for 15 years recently and whose wife became the first recipient of the Unexplained Wealth Order in UK). Dauvergne and Bashirov not only sit together on the board of the Chamber of Commerce Luxembourg-Azerbaijan, but worked together on a long list of companies, from London-based consultancy VES Consultancy to Luxembourgish holding company Tiara. The latest revelations about Dauvergne’s problematic business ties will likely solidify European lawmakers’ resolve that the free zones represent an unacceptable risk for the bloc.

Despite the mounting evidence that Le Freeport, its analogue in Geneva and countless other freeports around the world are affording criminals a free pass, Juncker has been “condescending” and “dismissive” in response to MEPs’ concerns. The TAX3 committee focusing on financial crime, of which Wolf Klinz is a member, has recommended that freeports be phased out in the EU what was supported during the plenary vote of the European Parliament by overwhelming majority (505 – in favour, 63 – against); however, Juncker’s lacklustre response suggests that the European executive does not have the political will to take such a step.

A poisoned chalice

Juncker may not be ready to shutter the continent’s freeports, but the controversy they have incited should demonstrate to British decision-makers that inviting free-ports into the UK carries more risks than rewards. Any benefits offered by the tax-free zones are likely to be offset by losses elsewhere in the country, while the potential for them to be exploited and abused by unscrupulous individuals makes them a poisoned chalice which Britain should reject outright.

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