TAX3: Freeports Enable Financial Crimes?

On October 15, 2018, a meeting of the European Parliament's Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance (TAX3) public hearing was held in Brussels. The risks of freeports and the future of free economic zones in the European Union was one of the key topics. 

Profit over Transparency

Freeports, as special, tax-exempt economic Free Trade Zones (FTZ). through their status provide plentiful opportunities for economic stimulation they also create favourable conditions for covering-up financial crimes such as tax evasion, trade in stolen goods and money laundering. 

Evelyn Regner, an MEP who was on the parliamentary delegation that visited Luxembourg Freeport last February, said: “[The freeport owner] has basically got a black hole. It’s a real lack of transparency. Do you know what’s actually stored there? Do you know what kind of value these things have? What motivation do they have for putting those works of art in a bunker? The only reason can be is that they want to hide this wealth.” Indeed, one can’t help but wonder why such opacity is needed.   

Charles Carr, a financial crime expert and a speaker at the hearing, pointed out that while freeports do provide safety, security and high-quality services, general public and authorities know too little about who buys what and for how much in these freeports. The items such as artworks and antiquities may be stored indefinitely in such facility and sold multiple times without ever leaving its confines, and very few people would know what is actually going on. Today freeports are subject to many laws that were supposed to regulate their activities, but the enforcement of such laws leaves much to be desired. But with certain measures taken, the transparency level of freeports could increase drastically.  

A notable example would be Geneva freeport. Founded it 1888, it opened a high-security art facility with over 10,000 square meters in 2014, taking total capacity to 52,000 square meters. Swiss customs, in charge of checking goods in freeports since they became a part of its remit in 2007, does not publish the value of goods declared by customers. A 2014 Swiss Federal Audit Office (SFAO) report quotes estimates of over $100 billion for the Geneva sites. 

Two years ago, Reuters reported that looted Turkish and Italian antiquities seized at the biggest Swiss freeport in Geneva raised the possibility that many artefacts illegally excavated from Libya, Syria or Iraq could lurk in these secretive storage sites, or be stowed there in the future. Quite apart from the loss of such treasures from the public eye, there is the fear they could be used to help fund shady practices and the activities of militant groups. 

The biggest operator in Geneva freeport had long been Yves Bouvier, an art dealer and former owner of Natural Le Coultre shipping and storage company. In 2015, he became involved in the notorious “Bouvier Affair” when Russian billionaire Dmitry Rybolovlev accused the Swiss of defrauding him of $1b over the purchase of 38 artworks in 2003-2014. Bouvier's dealings are currently being investigated by the authorities of several countries including Monaco, France and Switzerland.   

Yves Bouvier

But the situation with Geneva freeport changed drastically in recent years. The reforms were prompted by a highly critical report published by the Swiss Federal Audit Office (SFAO) in January 2014. In particular, the SFAO highlighted the risks that stemmed from unlimited duration for storing property in the freeports, with “very little movement of merchandise, meaning that goods are stored for long periods of time, sometimes [for] several decades.” Such warehousing, the report concluded, can only be used for “tax optimisation for extremely valuable merchandise (artworks, precious metals), which is not in line with the main function of customs warehouses [as temporary storage facilities for goods in transit], or the spirit of the law.”  

Yves Bouvier and his Freeport Kingdom

Following the publication of the SFAO report, reputational issues from multiple investigations into the Geneva Freeport as well as the initiation of criminal proceedings for fraud against the Geneva Freeport’s then-biggest tenant Yves Bouvier, who has long been known as “The Freeport King”, Switzerland introduced new measures to prevent criminal activity at its free trade zones. 

First, the Swiss Money Laundering Regulation now requires involvement of a financial intermediary in asset transactions exceeding CHF 100,000. This would allow for creation of a formal record – i.e. a paper trail – of this transaction. Alternatively, if parties for some reason require full anonymity, the seller is required to perform adequate due diligence into the buyer’s sources of funds in order to confirm their legitimacy. Second, The Swiss Customs Act imposed a 6-month time limit on goods stored in freeports. This rule constitutes a drastic change from the previously unlimited time the goods could spend in the freeport. The law, however, still allows for the Swiss Federal Customs Administration to grant extensions of this time limit, if substantial reasons for it are demonstrated.  

These two measures proved extremely effective and even forced Yves Bouvier, once the biggest tenant in Geneva freeport, to sell out of his family business Natural Le Coultre in 2017 and leave the Geneva freeport altogether. However, he still owns and manages freeports in Luxembourg and Singapore.   

Negligence or Complicity?

In contrast, the freeport of Luxembourg, founded in 2014, became even less transparent than before. Fabien Grasser, editor-in-chief of Luxembourgish web-site Le Quotidien and another speaker at the TAX3 hearing, mentioned that European Parliament's Committee of Inquiry into Money laundering, tax avoidance and tax evasion (PANA) visited “Le Freeport” earlier this year. They had many questions for the management but they remained unanswered. Then PANA members forwarded them to the grand duchy’s Ministry of Finance and Customs Service. Their response was, in a nutshell, that “everything is legal”. In addition, now it’s almost impossible to get inside “Le Freeport”, Grasser said. After the February visit MEP Ana Gomes who led the inquiry said that further investigation was needed. “The important thing is transparency, is it possible to hide something? There is a protection wall between the Freeport and customs so we must continue to discuss with them,” she said. “Le Freeport” CEO Philippe Dauvergne was invited to the TAX3 hearing but didn’t show up.

A parliamentary investigation of the two freeports in Geneva and Luxembourg led by MEPs Ana Gomes and Werner Langen between July 2016 and December 2017 reported late last year that “lack of control” at the freeports is “enabling money laundering and untaxed trade in valuables.” Their report concluded: “storage facilities of this type could be used to launder money as they circumvent international transparency rules.”As there’s a total of some 50 freeports across Europe, another possible problem could be other companies copying Bouvier’s model to evade European oversight.  

Is There a Way Out?  

Another issue “Le Freeport” is facing is the reputational risks associated with its owners and management. Yves Bouvier, who is the majority shareholder, lent his name to one of the most infamous art market frauds. In Switzerland, tax authorities launched an investigation into Bouvier in August 2017 for suspected tax evasion amounting to $100m and failure to declare income from his offshore ventures (in BVI and Hong Kong). That’s probably not the best example of compliance and transparency. 

Furthermore, Bouvier’s close associate Jean-Marc Peretti was a significant shareholder of “Le Freeport” at incorporation (and as late as in October 2013). Several observers – including MEPs Gomes and Regner – expressed concern over his involvement in the Freeport due to his reputational profile. Peretti is described in the French media as a figure who originated from the gambling circles in Paris and West Africa, and linked to the powerful Corsican mafia families. Another known shareholder is Olivier Thomas who also served as freeport’s chairman from April 2015 to April 2016. Thomas, however, also ended up withdrawing from this position due to legal issues. In March 2015, he was accused by Picasso’s step-daughter Catherine Hutin-Blay of “stealing” two Picasso artworks from the Art Transit International facilities in Gennevilliers, near Paris (these facilities are owned by Bouvier). In May 2015, French Brigade de répression du banditisme (BRB) opened an investigation into the matter, accusing Thomas, Bouvier, and Peretti of fraud, money laundering and theft of cultural property.

The concerns caused by the situation at “Le Freeport” prompted MEP Jeppe Kofod, who was in attendance at TAX3 hearing, to raise a question asking whether the EU needs its own “FBI” to deal with financial crime. 

Charles Carr outlined several measures that would help to increase the transparency level at the freeport of Luxembourg. It includes taking the lead from its Geneva counterpart: the opportunities for opaque transactions should be minimized and an appropriate time limit should be set on asset storage time. Furthermore, the authorities should prevent “outsourcing” of anti-money laundering responsibilities and provide additional due diligence and proper customs oversight. Needless to say, freeports also should not be synonymous with controversies such as the Yves Bouvier affair.   

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Phillipe Jeune

Phillipe Jeune

Phillipe Jeune is a Paris-based freelance journalist, and an occasional contributor to EU Today. He has a background in intelligence gathering, and he specialises in business matters, with a particular interest in Central Asia and the Middle East.

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