Banks are being urged to pay closer attention to the crime risks associated with free trade zones (FTZs), with fresh research warning of potential exposure to trade-based money laundering, as well drugs, weapons and counterfeit goods trafficking.
Defined as areas where customs duties do not apply in the same way as in the rest of a country’s territory, there are now believed to be at least 3,500 free zones in operation around the world, up from just 79 in 1975.
In some regions, FTZs are becoming more popular. In the UK, for example, government officials have this month announced plans to establish 10 new free ports across the country as part of an “ambitious new customs model” for post-Brexit trade.
However, a new report by London-based security think tank RUSI warns that a lack of consistent standards, supervision or enforcement mean banks, traders and logistics companies operating around FTZs are at risk of exposure to money laundering and other financial criminal activity.
Reports of seizures by customs authorities over a seven-year period “implicate FTZs in the transit of a slew of products”, the report says.
“Drugs, counterfeits and tobacco accounted for 22%, 20% and 10% of seizures respectively, but seizures of weapons, wildlife and foodstuffs were also recorded in statistically significant quantities,” it warns.
“Press reports implicate FTZs in further types of illicit trade, such as the storage and sale of stolen antiquities, and illicit trade in fuel was mentioned during research interviews.”
The report cites a 2010 example of a trade-based money laundering scheme used by drug traffickers with ties to Lebanon’s Hezbollah, designated as a terrorist organisation in the UK and US. Criminals were able to exploit commodities trading networks in Asia to move more than US$15mn per month in narcotics proceeds through businesses operating in Panama’s Colón Free Zone.
More recently, it notes that US sanctions regulators took enforcement action in July this year against a company incorporated in the UAE’s Jebel Ali Free Zone, found to have exported cigarette filters to North Korea in breach of extensive UN and US trade restrictions.
An OECD report published in 2018 says that generally, the establishment of a new free trade zone “is associated with a 5.9% rise in the value of counterfeit exports from the host economy”.
That said, RUSI warns against a “blanket approach” to FTZs, as not all carry the same risks. For example, a Morocco case study leads the think tank to suggest free zones may actually pose lower criminal risks than other border crossings and logistics hubs as they are subject to a higher level of regulation and control.
For banks involved in supporting trade, the report recommends they pay closer attention to whether they could unwittingly be helping facilitate illicit activity passing through free zones.
“Financial institutions engaged in financing businesses that trade through FTZs should consider incorporating FTZ risk into their [anti-money laundering and counter-terrorist financing] risk assessment in addition to or instead of the broader country risk,” it says.
Free ports in post-Brexit Britain
Alexandria Reid, a research fellow at RUSI and one of the report’s authors, tells GTR that a UK-based analyst at a global bank admitted there has been “a general lack of understanding about what FTZs are, why they are used and how to assess risk at the individual zonal level” across the financial sector.
However, due to the British government’s plans to introduce a more flexible customs model once the UK is no longer trading on European Union terms, that is starting to change.
“That bank’s interest in the topic was stimulated by the introduction of 10 new free ports in the UK, which has made some institutions sit up and re-evaluate their exposure,” Reid says.
“Given that repackaging and relabelling facilities in FTZs are also commonly used to facilitate sanctions evasion, many logistics and shipping companies will be looking to evaluate their exposure too.”
According to an announcement by HM Treasury on October 7, firms will be able to import goods into free ports without paying tariffs, then process those into a final product. That product can either be sold in the domestic market – after a tariff is paid – or exported elsewhere tariff-free.
The government adds it “wishes to deliver free ports as soon as possible”.
The move to grow the number of UK free ports can be considered a departure from the approach pushed by some EU officials in recent years. For example, in a 2019 resolution on financial crime and tax evasion, the European Parliament called for “the urgent phasing out of the system of free ports in the EU”.
Concerns over illicit activity have been raised during a cross-party International Trade Committee inquiry into the free ports project.
Simon Bird, regional director at Associated British Ports – a port operator that manages around 25% of the country’s maritime trade – warned the committee in July that “with the free port incentives we have been talking about, we will be a potential magnet for organised crime”.
“We would have to ensure we had adequate security and checks in there, working with the police and the National Crime Agency to ensure we had the right protection there to minimise and prevent that happening,” he said.
According to evidence given by Linklaters’ Charlotte Morgan in September, some of those measures are already in place. The EU-wide 5th Anti-Money Laundering Directive, effective since January, includes “a number of changes that are designed to help in this area”, said Morgan, a partner at the law firm’s global energy and infrastructure group.
“Freeport operators are now anti-money laundering gatekeepers, which means they are obliged to report suspicious transactions to designated financial intelligence units,” she said.
“Freeport operators are also designated as non-financial-obliged entities and subject to the same sort of customer due diligence requirements as, for example, other parties are.”
RUSI’s Reid says the increased attention being paid to FTZs “will likely force regulators to look more closely at educating and supervising the private sector”.