EU example suggests the UK must tread cautiously with freeports

As of November 16th, cities and towns across England can start vying to be the location of one of the UK’s first seven freeports, specially designated zones with exemptions from normal tax and customs rules. The Treasury’s decision to open the bidding process is the first step in its longstanding dream of establishing a network of up to ten of the facilities across the UK, a scheme which Chancellor Rishi Sunak suggested as early as 2016 could boost British trade and manufacturing post-Brexit.

The network of freeports, Sunak argues, will be vital to levelling up disadvantaged communities and turbocharging the UK’s economic recovery from the bruising recession it has suffered as a result of the coronavirus pandemic. With time running out to secure a post-Brexit trade deal and recent analysis by the accountancy firm KPMG indicating that leaving the European Union on WTO terms would more than halve the UK’s economic growth and ensure that its economy didn’t return to pre-pandemic levels until the end of 2024, a lot is riding on Sunak’s freeports plan.

An economic boon or an unacceptable risk?

The freeports idea is certainly not without its ardent supporters. Several locations around the UK, from Milford Haven in Wales to a coalition of sites in the North-East, have already announced that they intend to mount bids to become part of the scheme. Other key stakeholders, meanwhile, remain unconvinced--the devolved government in Wales remains sceptical about freeports’ supposed economic benefits and has highlighted a number of risks they might pose, while central Labour Party figures have suggested that the facilities are a cover for “storage spaces for the super-rich to dodge taxes and launder money”.

Unfortunately, the EU’s own experience with freeports--especially a flagship facility near the Luxembourg airport--indicates that these worries aren’t particularly off base. A recent academic paper suggesting that the breed of freeports showcased in Luxembourg, a business model pioneered by Swiss art dealer Yves Bouvier, could be “the contemporary version of the numbered Swiss bank account or the suitcase full of cash” only emphasizes the fact that British policymakers will have to watch their step in order to make sure that freeports don’t drain the economy rather than bolster it.

The freeports that Yves Bouvier built

Freeports, in some form or another, have existed in Europe for more than a century, getting their start as warehouses where goods in transit could break up their journey without being excessively taxed. As outlined by a recent paper by Thomas Jefferson University researcher Samuel Weeks, however, the Luxembourg freeport is a far cry from a simple storehouse with special tax rules. Like founder Yves Bouvier’s Singapore freeport, Le Freeport Luxembourg resembles a fortress with its seven-ton doors, magnetic locks and biometric scanners.

Inside its climate-controlled vaults, everything from vintage wines to artistic masterpieces remain locked up in an “untaxed limbo”. As Weeks noted, the “parallel fiscal universe” in the type of freeports pioneered by Yves Bouvier “seems entirely inconsistent with [freeports’] original purpose of storing ‘goods in transit’”. Inconsistent though it may be, these freeports’ tax advantages and general lack of transparency has proven an appealing prospect for wealthy “collector-investors” looking for a secure and discreet place to stash their luxury goods.

The “offshore” nature of freeports helps collectors get around restrictions such as the “cultural property protection laws”—essentially restricting the export of particularly old or valuable art— which Germany and Italy have passed in recent years. What’s more, traders who—for either legitimate or less savoury reasons—want their operations couched in secrecy appreciate the fact that fine art and other luxury goods can be sold within the freeport without having to pass on information about the buyers and sellers, such as their country of origin, to fiscal authorities.

The new hub for financial crime?

Unsurprisingly, the combination of the Luxembourg freeport’s layers of secrecy and special tax status has repeatedly raised red flags among independent observers, who have suggested that, as governments have cracked down on traditional offshore financial activities and banking secrecy, freeports may be filling the niche left behind, with freeport operators’ “see no evil” approach to compliance with anti-money laundering initiatives providing bad actors with a new way to cache wealth out of sight.

Yves Bouvier

The details of Bouvier’s role at the Luxembourg freeport, as well as his own chequered legal history, have only exacerbated the concerns that the facility might be a vehicle for financial crime. On top of the unusual detail that Bouvier is simultaneously the owner and the largest shareholder of his freeports in Luxembourg and Singapore, one supporter of the Luxembourg freeport told researcher Samuel Weeks that “[Bouvier] doesn’t know what the contents are in the [freeport]. It is like real estate and [Bouvier] is selling condos. [He] rents the space but doesn’t know what contents are put inside”—making it difficult to imagine how freeport management could carry out thorough due diligence.

The fact that Bouvier (pictured right) has been accused of defrauding one of his former clients out of more than €1 billion and is himself under investigation in Switzerland for potential tax evasion, meanwhile, led a European parliamentarian to warn the House of Commons that any system of British freeports should have a two-part “Bouvier rule” forbidding the storage of ultra-high value artwork and requiring stepped-up due diligence on freeport operators.

A better system for England.

Such stipulations could go a long way towards mitigating the risks that have made a number of British policymakers sceptical that the government’s freeport scheme is a sustainable path to post-Brexit prosperity. After all, as Weeks’s recent paper highlighted, many of the flaws in the Luxembourg freeport were reflections of the Grand Duchy’s longstanding tolerance for banking secrecy, offshore financial activities, and wealth of dubious provenance.

European parliamentarians were so concerned by what they observed while visiting and investigating the Luxembourg freeport that they have urged the closure of all such facilities across the bloc, but it’s definitely possible to imagine a safer, more transparent model of special tax zones which could contribute to the UK’s economic recovery. British policymakers, however, will need to learn from their compatriots across the Channel to ensure that their new freeports do not do more harm than good.

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EUToday Correspondents

EUToday Correspondents

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