Can the UK develop a safer, more robust freeport system?

On July 13, the UK concluded its public consultation on the establishment of up to 10 special tax zones, known as “freeports”, across the UK.

As part of the autumn Budget, the Treasury is expected to solicit applications from areas hoping to host one of the new freeports. The scheme has become a centrepiece of Boris Johnson’s plans to reap economic benefits from Brexit and boost the UK economy after the coronavirus pandemic.

It’s not surprising that the establishment of the UK’s first freeports in eight years—Britain had seven such facilities, all now closed, between 1984 and 2012—has become a passion project for Boris Johnson’s Treasury. Indeed, Chancellor Rishi Sunak has advocated for the low-tax zones since his days on the backbench. In a 2016 policy paper, he suggested that British freeports could create 86,000 jobs and revitalise large swaths of the industrial North.

Such prospects naturally appear particularly rosy at the moment. The UK economy is rebounding more slowly than expected after months of lockdown. Economists warn that the country may have suffered permanent economic damage, while the UK government’s spending watchdog sounded the alarm over an “explosive debt path” which could herald the severest economic decline in 300 years.

Freeports, however, are no magic cure for Britain’s fiscal malaise. In addition to concerns that the special trade zones merely shift economic prosperity from one region to another, the UK will have to confront head-on the alarming accusations which have been levelled at freeports abroad. From Luxembourg to Singapore, freeports have come under fire for insufficient oversight which has turned these facilities into “black holes” posing serious risks of money laundering and tax evasion.

The basic  idea of freeports—of tax-exempt storage spaces for goods in transit—has been around for decades. The 21st century, however, has seen the emergence of a new breed of freeport, largely promoted by Swiss businessman Yves Bouvier. Bouvier branched out from family shipping firm Natural Le Coultre, once the largest tenant at the Geneva Freeport, to found similar facilities in Singapore and Luxembourg. Bouvier’s freeports were veritable Fort Knoxes, bunkers in which expensive goods from paintings to vintage cars were snugly packed into ultra-secure vaults.

The facilities unsurprisingly proved popular with high-net-worth individuals who enjoyed substantial tax savings by stashing their luxury assets in the freeports. Unfortunately, policymakers began to suspect that their commitment to secrecy was attracting less-savoury characters as well. In 2016, the Paris-based Financial Action Task Force (FATF) singled out the Singapore Freeport as an emerging risk factor for money laundering and the financing of terrorism. Shortly afterwards, European policymakers began taking a closer look at the facility in the Grand Duchy, Le Freeport Luxembourg.

A year-long investigation carried out by the European Parliament’s TAX3 committee, which handles financial crimes, uncovered a smorgasbord of red flags. MEPs who visited the Luxembourg facility weren’t convinced that the freeport’s administrators had a steady hand on the tiller—Portuguese MEP Anamaria Gomes lamented that “the controls were extremely perfunctory and we did not see any real attempt to establish who were the real owners of the goods. [The freeport] could easily be used to store goods away from anybody’s control, for putting them in the dark when it’s more convenient, avoiding tax”.

One of Gomes’s colleagues on the TAX3 committee, German MEP Wolf Klinz, referred to the facility as a “blind spot” in Europe’s efforts to stamp out financial crime, and drew special attention to the “dubious and highly problematic reputational profiles of Le Freeport’s private shareholders”, a veiled reference to Yves Bouvier.

Fast forward to 2020 and Le Freeport Luxembourg is in both financial and administrative difficulty. Robert Goebbels recently resigned from the presidency of the facility’s administrative board, CEO Philippe Dauvergne is already describing le Freeport as “a happy memory” and Luxembourg’s finance minister recently denied that the state would intervene to prevent the freeport, which is more than €7 million in the red, from going belly-up.

With two of the best-known freeports making headlines for their dire financial straits and their lax enforcement of anti-money laundering measures, is the UK staking its economic recovery on a fatally flawed business model? Not necessarily—but it’s paramount that British policymakers learn from other countries’ disappointing freeport forays.

Anamaria Gomes, the Portuguese MEP alarmed by Le Freeport Luxembourg’s haphazard oversight, has urged the UK government to implement a so-called “Bouvier rule” prohibiting the storage of artworks above a certain value in its freeports, and further highlighted the importance of screening potential freeport investors to ensure that they are “fit and proper”.

An April report by the Royal United Services Institute laid out other measures which could ensure that UK freeports boost Britain’s economy and prestige, rather than draining them through financial crime. As the report notes, it’s vital to establish freeports in locations with low pre-existing criminal risk profiles. Adding a provision for a criminal risk audit in the UK’s criteria for selecting the sites of its 10 freeports, then, could significantly decrease the chances of these facilities being ill-used.

Freeports’ chequered history abroad should impress on the UK government the need to be extremely cautious when establishing a network of the special tax zones. At the same time, it’s not written in stone that, as Sir Ed Davey suggested, freeports “could turn the UK into the world capital of money laundering”. With care and robust oversight, London can build a more sustainable freeport model.