UK Free Ports Plan Risks Influx of Dirty Money, Say Experts
13 Oct 2019

In his first speech as the UK’s new prime minister in July, Boris Johnson slipped in a passing reference to free ports that sent alarm bells ringing across the nation’s anti-money laundering (AML) community.

Speaking outside of 10 Downing Street, Johnson had called on the country to “look not at the risks, but at the opportunities” offered by Brexit. One such opportunity is to “create free ports that will drive growth and thousands of high-skilled jobs in left behind areas,” he said.

Within days, it became apparent that this idea was more than just a passing reference. Only a week later, the department for international trade officially invited seaports and airports around the UK to bid for free port status, announcing plans to set up 10 new zones after the country’s exit from the EU.

The Port of Tyne in northeast England, Milford Haven in Wales and London Gateway have already expressed an interest in the proposal. A free ports advisory panel to suggest the best way forward has also been set up. The international trade secretary, Liz Truss, later asserted that free ports would transform towns and cities across the UK like the London Docklands did in the 1980s.

The free ports being considered are warehouses within free trade zones, originally meant to serve as a depot for goods in transit. Scattered all over the world, they now function primarily as storage facilities, often for expensive artwork but also for other high-value assets like gold, precious stones, wine collections and antiques.

The main incentive for traders is the exemption from VAT and import and export duties, and because there are no customs checks goods can be stored without being declared and inventoried.

The European Commission has a record of 82 free ports, with the most, 11, in Croatia. Nine countries, including the UK, have only one free port, while five countries have none. The best-known are the Geneva Free Ports & Warehouses in Switzerland, set up in 1854, and Le Free Port in Luxembourg, opened in 2014.

‘Perfect places’

For all their purported economic benefits, the ports are not without significant drawbacks, according to sources. Anti-corruption experts have pointed out that the relative secrecy and lax regulation associated with free ports make them no different from offshore financial centres that risk becoming havens for money laundering and tax evasion.

Those fears were backed up by the European Commission on the same day that Boris Johnson made his speech outside of Downing Street. In its second supranational risk assessment, the commission highlighted free ports, along with professional football and investor citizenship schemes, as one of seven issues that the EU intends to monitor more closely for money laundering and terrorist financing risks.

A 2018 report by the European Parliament concluded that free ports are vulnerable to crime in part because they are not monitored by customs officials, who are obligated to report any suspicious transactions they encounter to a national financial intelligence unit. Instead, the goods entering and leaving free ports are not monitored at all.

“This suspension of fiscal responsibilities can lead to an oversight of customs’ security function,” said Alexandria Reid, a research analyst at the Royal United Services Institute working on a global project on illicit trade in free trade zones. “In some countries, customs have historically perceived free zones as ‘transit’ issues—effectively ignoring illicit trade or money laundering issues so long as there is no serious leakage of illicit goods or funds into the national economy.”

Because free ports do not require disclosures of beneficial owners, anyone can bring in goods on behalf of anyone else, Reid said.

The lack of transparency ultimately permits unsourced goods to be bought and sold with cash.

Moreover, because free ports rely on self-declarations of the value of any particular export, there is no insight into whether goods have been assigned a false value as part of a trade-based money laundering scheme, according to Reid.

Last week, the US-based watchdog group Global Financial Integrity (GFI) said in a report that criminals view free ports as “perfect places to manufacture and transport illicit goods, as controls and checks by authorities are often irregular or absent.”

“Illegal transactions can be easily disguised as legal, using trade-based money laundering (TBML) schemes that are notoriously difficult to detect,” GFI said.

In some cases, national authorities can be completely ignorant of exactly what is stored in free ports, according to Sandrine Giroud, a partner specialised in art law at the firm LALIVE in Geneva, who cited a 2014 scandal as an example.

“The Swiss Federal Audit Office (SFAO) found that the government was not sufficiently aware of the value of goods stored in customs warehouses,” she explained, referring to the office’s discovery that the 1.2 million pieces of art at the Geneva Free Ports & Warehouses had significantly appreciated in value.

News outlets separately estimated the goods to be worth around CHF 100bn.

In 2017, Swiss authorities settled a years-long dispute when a rare sarcophagus traced back to present day Turkey was returned to the country after it was uncovered at Geneva port. Prosecutors believe it was stolen in the 1960s and shipped to Switzerland, where it remained undiscovered for decades.

In 2016, an Italian police investigation led to the discovery of stolen Roman and Etruscan artefacts stored in the Geneva free port for 15 years by an English art dealer who was later imprisoned. More than a decade earlier, Swiss customs discovered 200 ancient Egyptian artefacts, including two mummies, at the free port.

Concerns about the criminal abuse of free ports are largely unfounded, according to the British Ports Association (BPA), which represents 100 members. The association believes that, should Johnson’s plan be implemented, UK officials would take additional steps to shield the free ports from illicit activity.

“The government is likely to establish an overarching governance body to monitor free port areas,” said Mark Simmonds, BPA head of policy and external affairs. “It is also worth remembering that about half of the UK’s trade is from the EU, [and therefore] currently exempt from routine customs controls, but we continue to have secure borders and very low evidence of criminal activity at ports.”

‘A real question mark’ 

Concerns linked to free ports could be partially alleviated in January, when the EU’s Fifth Anti-Money Laundering Directive (5AMLD) comes into force. The United Kingdom has pledged to adopt the directive post-Brexit, but its ultimate course of action could be contingent on the result of ongoing political skirmishes.

Under 5AMLD, traders of artwork and those acting as intermediaries in the trade of artwork, including free ports, will be subject to AML rules and oversight. This means they will have to conduct customer due diligence checks and report suspicious activity whenever transactions exceed €10,000 or more.

But such AML obligations must be extended to other types of goods if free ports are to be effectively protected from criminals, according to experts.

“If there is a danger associated with the use of free ports for the storage of artworks because they are the type of asset that might attract a money launderer, it’s hard to understand why other high-value goods over €10,000 haven’t been captured,” said Ruth Paley, of counsel at Eversheds Sutherland. “It’s not clear why that distinction has been drawn and whether it is meaningful to differentiate between the two types of assets.”

To reduce the risk of illicit finance, the government could consider empowering free port administrators to take on supervisory duties, said Reid, adding that administrators are “quite often missed out of the equation.” Ideally, customs officials and administrators should be required to share information and customs security checks should be standardised and frequent, Reid added.

But by and large, regulatory requirements are only meaningful when backed up by enforcement, sources noted.

“You only have to look at recent criticisms of the way that Companies House operates to identify issues with self-certification,” remarked Paley. “There’s a real question mark over whether KYC checks would be as rigorous if not required by regulation, backed up by criminal penalties and enforced by the government.”

Left in the dark

For bank compliance staff charged with preventing money laundering, free ports and the transactions that take place within them will likely always retain a measure of mystery.

“Because of the money laundering risks associated with free ports, banks may want to conduct additional checks on transactions involving assets stored there,” Paley said. “But it is unlikely that the bank would be aware of the involvement of a free port in a transaction unless this was disclosed by the customer.”

Bank compliance staff have to conduct KYC checks irrespective of where the goods are located in the same way they would for transactions involving offshore jurisdictions or high-risk activity, said Giroud. The involvement of a free port could raise additional questions for compliance staff, she added.

“For example, if an artwork has been stored at a free port for decades, the bank may want to ask additional questions to understand the background,” Giroud said.

Future UK free ports and related warehouses may welcome additional scrutiny, as was the case in 2016 when Swiss authorities implemented a raft of AML rules aimed at international trade.

This included making serious tax offences a predicate offence to money laundering, empowering customs to monitor the entry and exit of goods, setting a 6-month limit on how long goods can be stored and amending multiple AML laws and criminal codes.

Warehouses and free ports were aware of the “huge reputational risk” the lack of regulations posed to them and wanted to make sure that their operations could continue in an appropriate manner, Giroud said.

Hiba Mahamadi is a freelance journalist based in the UK.

RiskScreen: Eliminating Financial Crime with Smart Technology

Advance your CPD minutes for this content, by signing up and using the CPD Wallet