International Policy Digest

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World News /07 Nov 2019

Take it From the EU: Freeports aren’t the Magic Bullet for the UK’s Brexit Quagmire

This year, the UK is remembering the fifth of November, the Gunpowder Plot of 1605, under unusually strained circumstances. Ironically for a holiday commemorating the fact that Parliament was not in fact blown up by Guy Fawkes and his fellow plotters, this year the famous Edenbridge Bonfire Night gathering will burn a massive effigy of polarizing former Speaker John Bercow—alongside Boris Johnson, Jeremy Corbyn and the Houses of Parliament themselves.

As the Edenbridge effigy burns, the bitterly-divided Parliament itself—which has presided over three failed Brexit deadlines and the most significant splintering of the major political parties in British history—will dissolve ahead of the UK’s first December general election since 1923. The public’s trust in Parliament is at rock bottom, while 10% of current MPs aren’t standing for reelection, citing death threats and the overall toxic atmosphere in Parliament.

Embattled PM Boris Johnson—who managed to lose his majority, a Supreme Court case, and the vast majority of his parliamentary votes in the span of three months—is hoping that inertia will let him hang onto his job and “deliver Brexit” at long last. If current polls are correct, Johnson may just get his wish—but he will then immediately be plunged into trying to prop up the UK’s sinking economy. Economists have warned that, even with Johnson’s new Brexit deal, leaving the EU will shave 4% off the British economy—some £1,100 per UK citizen.

Freeports: Johnson’s magic solution?

Johnson thinks that he has an ace up his sleeve in the form of freeports, which he highlighted in his speech at this year’s Tory party conference as one of the major benefits of being outside the European bloc. The troubled PM hopes to turn his fortunes around with the establishment of ten such zones with special tax regimes, suggesting that they may create “thousands of jobs” and “transform” economically-disadvantaged areas around the UK.

Freeports were historically intended as short-term solutions for goods, such as tea or grain, in transit, to avoid merchants double-paying taxes in multiple jurisdictions. In practice, however, freeports’ purpose has shifted over the years. The zones now frequently boast massive hyper-secure warehouses adjacent to seaports or airstrips where high-dollar goods can remain “in transit”—and, conveniently, tax-free—indefinitely.

These secretive bunkers often hold commodities like fine wine, luxury cars or famous artworks—the Geneva Freeport, for example, has been described as “the greatest museum no-one can see.” More than a million of the world’s most precious artworks are estimated to lie in its windowless vaults, including roughly 1,000 of Picasso’s creations.

The Geneva Freeport, founded in 1888, was a particularly early example of the phenomenon, but the concept has spread widely in the 21st century. Swiss luxury goods shipper turned art dealer Yves Bouvier, whose company Natural Le Coultre used to be the largest tenant in the Geneva warehouse, has been such a keen advocate for freeports that he was nicknamed the “freeport king” after he opened similar facilities in Luxembourg and Singapore.

There are a number of reasons why the freeport craze took hold: the 2008 financial crisis caused investors to flee into alternative assets such as art, while a crackdown on famously secretive Swiss bank accounts sent tax avoiders towards freeports.

The next frontier in the fight against financial crimes?

What freeport proponents like Philippe Dauvergne, the CEO of Le Freeport Luxembourg, call “confidentiality,” European lawmakers consider a dangerous opacity which is “the new emerging threat” to the European bloc’s fight against money laundering and tax evasion. EU policymakers are even concerned that freeports may play a role in financing terrorism after looted antiquities have turned up in some of the special warehouses. Earlier this year, 505 members of the European Parliament voted to make the “urgent” phasing out of freeports a top priority, and policymakers are taking concrete steps to eliminate the zones’ use as tax havens.

Just weeks ago, after ongoing scrutiny from the International Consortium of Investigative Journalists (ICIJ), European lawmakers agreed to create a permanent subcommittee tasked with investigating financial crimes, from tax avoidance to money-laundering schemes. The permanent committee, initially proposed by the Greens and the European Free Alliance, should be operational by the end of the year and streamline the Parliament’s ability to follow up on concerns about potential financial crimes.

The fight against financial crimes in the European bloc has particularly focused on freeports following a damning report by the European Parliament’s Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance (TAX3). MEPs on the committee were left with more concerns than answers after a tour of Le Freeport Luxembourg: as Anamaria Gomes MEP explained to the BBC, “We came away from our visit to Le Freeport with a lot of apprehension. This is a way that could be easily used to store goods away from anybody’s control, for putting them in the dark when it’s more convenient, avoiding tax. The controls were extremely perfunctory and we did not see any real attempt to establish who were the real owners of the goods.”

Yves Bouvier’s troubling reputation casts a further shadow over freeports

This seemingly lax attitude towards transparency understandably disquieted European policymakers. What’s more, their suspicions that freeports are often “used for shady, illegal transactions” were significantly exacerbated by the black marks on the reputation of some of the European freeports’ greatest defenders.

Take “freeport king” Yves Bouvier, for example, who founded the Luxembourg facility in 2014 and remains its majority shareholder. Bouvier has a knack for attracting legal controversy—on top of being investigated by Swiss authorities for potentially evading some CHF 165 million in back taxes, the Swiss entrepreneur is locked in a vicious legal battle with his former client, Russian billionaire Dmitry Rybolovlev.

Rybolovlev has filed suit against Yves Bouvier in a number of jurisdictions, arguing that the Swiss dealer defrauded him out of over a billion dollars by dramatically overcharging him for some 38 works of art and helping himself to the difference. According to the Russian collector’s legal complaints, Yves Bouvier pulled this scheme off with the help of famed auction house Sotheby’s. Over and over again, as recently released court documents show, Bouvier would buy paintings from Sotheby’s, then turn around and sell them to Rybolovlev at a stiff markup. Bouvier often requested preliminary valuations from Sotheby’s executives to back up the high prices he was charging his Russian client, sparking concerns that he and the auction house had been in cahoots to fleece Rybolovlev. However, Yves Bouvier and Sotheby’s have both strenuously denied any wrongdoing.

The disputes surrounding Bouvier have further soured European policymakers on the idea of freeports. As the TAX3 report noted, the fact that Le Freeport Luxembourg’s founder is “entangled in an affair involving alleged fraud and insider trading”—and reports that two of Bouvier’s business partners at Le Freeport have ties to Corsican organized crime and stolen art—only emphasizes why the EU is keen to phase out the zones as quickly as possible.

With Brussels hastening its efforts to shutter the bloc’s freeports as quickly as possible, considering them a wide-open avenue for everything from financing terrorism to money laundering schemes, it’s difficult to understand how they could help the UK cope with the damaging effects of Brexit. Rather, in a scenario where London is ratcheting down security and police cooperation with its neighbours, the opening of ten freeports could lure dangerous waves of financial criminals to British shores.