In the second of three reports on tax evasion in Europe, EU-OCS looks at freeports, which are increasingly coming under scrutiny by European policymakers as potential “black holes” for tax evasion and money laundering.
After a year-long investigation, the European Parliament’s special tax committee has found a quarter of the bloc’s member states—Luxembourg, Belgium, Cyprus, Hungary, Ireland, Malta and the Netherlands—behave like tax havens. The report will ratchet up pressure on the European Council and the European Commission to take concrete action, and comes as MEPs are taking an increasingly hard line on tax evasion and money laundering loopholes in the union.
One particular vehicle for financial malfeasance has been in the spotlight in recent months: so-called freeports, a term which refers to special free trade zones whose popularity has boomed over the last few years after banking secrecy laws were tightened.
MEPs taking a closer look at freeports
Freeports have come under renewed scrutiny in the EU after German MEP Wolf Klinz singled out Le Freeport Luxembourg in a January letter to European Commission President Jean-Claude Juncker. Klinz called the high-security facility “fertile ground for money laundering and tax evasion” and a “blind spot” in efforts to stamp out financial crimes in Europe.
Juncker rebuffed Klinz’s concerns “with condescension and dismissal”, causing the German MEP to retort that Juncker’s reaction has made it clear that “there is no political will to seriously investigate the possibility of fraudulent activities and irregularities related to the management of Le Freeport Luxembourg”. The tiff between Juncker and Klinz comes on the heels of an major public hearing on the subject last October in the European Parliament’s Tax3 committee.
The principle of freeports is simple—the massive warehouses, often in close proximity to airports, rail stations or seaports— provide secure, short-term storage for goods in transit and ensure that they won’t be taxed before they reach their final destination. In practice, however, many goods enter freeports and never leave, spending years being bought, sold and stored in an opaque, untaxed limbo.
As Danish MEP Juppe Kofud put it during the Tax3 hearing, the “parallel system” of freeports means that the world’s wealthy “have a safe and secure place to store [their] valuables, but that these valuables can be there forever, in a way, and [can] change owners and buyers and so on without any sufficient control of what is going on. So it is a huge avenue for illicit trade and also illicit money to flow around.”
In many cases, freeports do not have to declare the ultimate beneficial owner (UBO) of the goods they hold. What’s more, as Luxembourgish Green Party MP Henri Kox—whose party opposed Le Freeport—told EU-OCS: “the registered value of goods often depends on self-declaration, which in turn leaves significant room for over- or under-valuing. Freeports thus provide many layers of secrecy for anyone who wants to hide from tax authorities or creditors”.
This trifecta of related concerns—freeports’ lack of transparency, their potential use as a laundromat for dirty money, and worries that illicit goods may be lurking in the depths of the high-security vaults one journalist compared to Fort Knox—led Klinz to advise Juncker that “the risk of maintaining a facility of Le Freeport Luxembourg’s reputational profile within the EU customs territory could greatly outweigh the benefits”.
Le Freeport’s management insists that the facility offers “security not secrecy” and that Luxembourgish customs authorities check all goods entering or exiting the installation. Outside observers are less than convinced. Austrian MEP Evelyn Regner, who sits on the Tax3 committee, told EU-OCS: “When dealing with freeports you end up with more questions than answers. What is stored there and why? Who are the owners of the stored goods? What about the intermediaries concluding the business? And how can tax authorities ensure full control? Fact is, not even the owners of the freeports know the answers to these questions. And when so much value and secrecy come together it is more likely that the purpose is hiding assets in order to avoid taxes”.
Not only are freeports not particularly forthcoming: according to Fabien Grasser, editor-in-chief of the Luxembourgish paper Le Quotidien, they actively try to conceal the details of their operations. As Grasser told the Tax3 committee, “I’ve been working on somewhat sensitive subjects for a good twenty years and this one is particularly sensitive, given the reaction of the [Luxembourg] Freeport’s shareholders and management: I’ve received a plethora of threats in writing or via telephone”. Grasser further emphasized that since he and MEPs began digging into the freeport, the facility had become even more secretive.
Given the profile of Le Freeport’s shareholders—another issue which MEPs have highlighted—such furtiveness is perhaps unsurprising. Founder Yves Bouvier, known as the “freeport king” for the network of similar zones he operates around the world, has faced a laundry list of legal troubles, from allegations that he defrauded his former clients out of more than a billion dollars to an investigation by Swiss authorities to whom he might owe CHF 165 million in back taxes.
Bouvier’s involvement in other major freeports raises separate issues. As Ron Korver explained in a report prepared at the Tax3 Committee’s request, Bouvier’s “concentration of a worldwide network of connected free ports and different roles could imply a risk of conflicting interests and insider trading. The fact that Mr Bouvier is entangled in an affair involving alleged fraud and insider trading, may justify such considerations”.
Nor is Bouvier the only Le Freeport shareholder with a problematic background. Grasser testified that he had received further threats after addressing Jean-Marc Peretti’s alleged links to the Corsican mafia in articles. Dealer Olivier Thomas was accused by Picasso’s stepdaughter of having stolen some of the famous painter’s artworks.
A home for money laundering?
This lack of transparency is particularly concerning given the money laundering and other illicit financial flows freeports could conceal. Grasser told the European Parliament freeports “completely escape the usual financial controls which are imposed on banks, investment funds, trusts, etc.” After the financial crisis prompted the EU and the OECD to crack down on banking secrecy, freeports became increasingly attractive arenas for opaque financial dealings: in part because, as Henri Kox noted to EU-OCS, transactions at many freeports “can be effected in cash or even in kind”, leading to “money laundering and tax evasion risks”.
Kox highlighted the fact that in 2015— after Luxembourg’s coalition government concluded that “there were indeed money laundering risks” caused by Le Freeport— the grand duchy brought in anti-money laundering legislation cracking down on the common practice of freeport clients concealing their identities through networks of offshore companies and trusts.
The legislation, however, is difficult to implement in practice. For one thing, it requires freeports to self-report suspicious transactions. For another, financial intelligence units and customs bodies are frequently drastically understaffed and focus almost exclusively on goods entering or exiting the facilities, rather than transactions occurring inside the freeports.
Ron Korver explained that “it is not the role of customs to act as direct tax or anti-money-laundering (AML) supervisor”. As Klinz noted, despite improvements in recent years, “the path to adequate regulation […] remains long and fraught with complexities”.
Purveyors of illicit goods may also benefit from freeports’ relative opacity and the various barriers to effective oversight of the facilities. Geneva Freeport—in which Yves Bouvier was long the largest tenant—has had to sharply increase its supervision of the goods it holds after a Modigliani allegedly looted by the Nazis and a collection of priceless Etruscan and Roman antiquities were discovered concealed in its warehouses.
Geneva may have implemented stricter controls following the incidents, but concerns remain elevated that artefacts illegally taken from the Middle East are finding their way into freeports; their sale might even be funding militant groups. Former French Finance Minister Michel Sapin argued that the free zones are “a weak link in the fight against global terrorism”.
Given these extremely serious concerns over whether freeports are hampering European efforts to fight terrorism and cut down on money laundering and tax evasion, it’s unsurprising MEPs like Klinz are concluding that any economic benefits brought to the bloc by freeports aren’t worth the downsides.