How tax-exempt warehouses contribute to some $899 billion laundered each year globally and why they are a threat to our national security.
I worked in the offshore financial business for 15 years. I traveled extensively to the Caribbean, Bermuda, Channel Islands, Hong Kong, Singapore, et cetera. Despite the tightening of financial rules around the globe and erosion of bank secrecy, with the recent money laundering scandals in the Baltics, it is very clear that nothing has fundamentally changed since I left the business 8 years ago.
Simply put, financial crime is very easy if you find the right employee(s) willing to take a bribe. Financial criminals are also very resourceful, always finding new ways to stay one step ahead of regulatory authorities.
Freeports are an interesting concept that I ran into frequently in Curacao and similar locals. Essentially, they are tax-exempt warehouses that were used to house commodities on the move to facilitate commerce. But now some of them have turned to permanent repositories of fine arts, precious metals, rare wines and other luxury goods in which the real owners are often hidden behind International Business Corporations (IBC), essentially shell companies, to hide ownership and avoid taxation. Behind freeport’s closed doors they do financial transactions worth millions and millions dollars with little oversight and no taxes. Just to give an idea of the scale: according to experts a typical freeport might contain $20 billion to $30 billion worth of goods, and Geneva freeport, the world’s oldest, is estimated to hold $100 billion worth of artwork alone.
Freeport’s secrecy and confidentiality coupled with the vast amounts of money in the unregulated art market give enormous possibilities for money laundering and a host of other illegal activities, from tax evasion to concealing stolen goods. Apparently, that is the key reason why freeports have been springing up around the world in recent years. And many wealthy Americans are looking into them.
In a move that is too little, too late, global regulators are starting to shut shine light on, and even shut down the practice. The European Parliament has recently urged the EU to phase out all freeports in the union for that very reason. During the plenary vote in March 505 members of the parliament voted in favor and only 63 against this initiative.
It is “easier to move a valuable painting to the other side of the world than a similar amount of money.” Freeports therefore provide operators “with a safe and widely disregarded storage space, where trade can be conducted untaxed and ownership can be concealed”, declared a recent EU report on the issue.
One of such freeports in the EU is Luxembourg Freeport, which was built in 2013. Its majority shareholder is the controversial art dealer and Singaporean resident Yves Bouvier. Mr. Bouvier is now under investigation by Swiss authorities on suspicion of tax evasion worth $165 million; he has been sued by his former clients around the globe for alleged art fraud worth more than $1 billion. Among them are Canadian art collector Lorette Shefner and former fertilizer king turned the owner of the Monaco football club Dmitry Rybolovlev, and other big names. Picasso’s stepdaughter has accused Mr. Bouvier of stealing paintings. Mr. Bouvier was in the middle of a legal dispute for overcharging between Mandarin Trading art fund and Swiss gallery Peintures Hermes, associated with the Wildenstein family. Yves Bouvier was at one point arrested in Monaco as a result of criminal complaints against him.
The Luxembourg Freeport was tied to the now infamous “Azeri Laundromat, which laundered $3 billion through Danske Bank Estonia from Asian corrupt politicians and business transactions. These funds were partly used to bribe members of the EU parliament to get positive reviews on the human rights situation in Azerbaijan.
Freeport Singapore in which Mr. Bouvier is the major shareholder as well, has come under scrutiny, too. Its operations from the very beginning have been surrounded by rumors of money-laundering and stolen art works, media reports about how the facility was used to store cash by Indonesian tycoons.
The Financial Action Task Force - a multinational advisory group set up to combat money laundering - said in its anti-money laundering and counter-terrorist financing measure report that in some cases, the Singaporean authorities did not know enough about what was going on at Freeport, assessing the risks of money-laundering and terrorist financing at the location as medium to high. A recent investigation by French newspaper Paris Match pointed out to Singapore freeport as a place used to store many of the antiquities stolen by ISIS from Iraq and Syria museums.
According to expert estimations, ISIS has made between $4 and $7 billion from its illegal antiquities trade. These moneys were used to kill our soldiers in Iraq and Syria, to carry out devastating attacks on our allies around the world.
Despite the facts and obvious risks associated with freeports, it seems that they have high-ranking patrons. It is difficult to say what motivation they have. For example, in Luxembourg, Yves Bouvier was supported by people from the entourage of then Prime Minister Jean-Claude Juncker, now the head of the European Commission.
In Singapore, Mr. Bouvier partnered with the National Arts Council and the National Heritage Board of Singapore, as well as a number of influential local politicians. For example, his former lawyer, Edwin Tong, a former partner in the law firm of Allen and Gledhill, LLP, which advised during the opening and first years of Freeport Singapore’s operation, is now the senior minister of State in the Ministry of Law.
However, it can play a bad joke — Freeport Singapore could share the same fate as the saga of the Malaysian state fund 1MDB that shook the island financial center in 2017 and made a dent in the city-state’s reputation as a clean and trusted jurisdiction. This ended up decreasing the number of international corporations and Western businessmen willing to bring their fortunes to Singapore.
Singaporean units of three Swiss banks were involved in the money-laundering operations of the fund, and hundreds of transactions remained under the radar of strict know-your-customer regulations. Started at the request of the U.S. government, the investigation resulted in the shutdown of two of the Swiss entities, a $100 million fine for the third, and a re-entry ban for many of their top bankers.
Although the island city-state is taking steps to safeguard its reputation in the aftermath of this ugly incident, it may be ignoring similar risks at Freeport Singapore which could damage Singapore’s reputation even further.
Freeports are a threat to national security and the rule of law in Europe and Asia. They are a compliance and law enforcement problem worldwide that is being addressed cooperatively by the U.S., European and off-shore authorities, as governments seek to cut off terror financing and massive fraud and money laundering around the world.
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