Free Trade Zones and Financial Crime – A Faustian Bargain?
06 Nov 2019

Free trade zones (FTZs) present both opportunities and challenges for globalised trade. At their best, they facilitate frictionless trade and manufacturing, creating jobs and economic growth for local communities. At their worst, they enable illicit trade and the laundering of criminal proceeds. In this article, the authors examine how the integrity of FTZs could be improved by implementing existing and emerging initiatives and highlight where new thinking is required to raise global standards to protect against crime.

Who Does What?

There are two primary reasons why FTZs fall victim to criminal exploitation: weaknesses in governance and weaknesses in information sharing-procedures.

FTZs are typically governed by private companies or public-private partnerships that have gained a licence to operate the zone. These administrators run the FTZ according to internal policies and regulations, but the extent to which they are expected by their governments to enforce other laws and national regulations is sometimes woefully unclear.

The Revised Kyoto Convention on the simplification and harmonisation of customs procedures defines Free Zones as part of a country’s territory ‘where any goods introduced are generally regarded, insofar as import duties and taxes are concerned, as being outside the Customs territory’ . Yet despite the clarification from standard setters such as the World Customs Organization (WCO) that this should not affect the applicability of other laws, including those against money laundering and terrorist financing, the implementation and enforcement of these laws in FTZs often fall victim to the overarching objective of facilitating trade.

In the apparent absence of effective state regulation in some countries, several voluntary initiatives have been proposed to strengthen governance frameworks and controls. The Business Action to Stop Counterfeiting and Piracy , for example, advocates for the application of the WCO’s SAFE Framework of Standards to Secure and Facilitate Global Trade in FTZs. While the SAFE Framework does not explicitly refer to FTZs, it contains an already established set of global recommendations designed to strengthen the effectiveness of customs controls, with emphasis on the threat posed by terrorism and organised crime across all international trade. As of November 2019, 171 states had signalled their intention to apply the SAFE Framework, although the implementation of these standards cannot happen overnight and it remains unclear how many signatories will apply the recommended principles in FTZs.

The OECD has also worked hard to strengthen the governance of FTZs. In October 2019, the OECD Council formally adopted a Recommendation which provides a series of commitments to be taken at the state level to enhance the transparency of FTZs whilst not dissuading trade. Among other things, it reaffirms the need for law enforcement and customs to have direct oversight of trade conducted within an FTZ and stipulates that the administrators and businesses who operate within them must be made aware of their legal obligations.

In this vein, the OECD has also created a Code of Conduct for Clean Free Trade Zones, which accompanies the October 2019 Recommendation. This Code lays out a series of conditions that administrators must meet in order to be deemed a ‘Clean Free Trade Zone’. This places an emphasis on the necessity that both the state and the administrator take responsibility in ensuring an FTZ is properly governed.

More Transparency, More communication

In addition to bolstering the overall governance standards of FTZs, there is more work to be done on establishing basic protocols for the formal and regular sharing of information between FTZ administrators and the national authorities responsible for regulating those zones. At present, robust information sharing relationships at the national level remain limited, with very few – if any – public cases of good practice to draw from.

Improving information sharing between FTZ administrators and domestic authorities is an essential process in creating a more secure trading environment, primarily because such data is a pre-requisite for customs’ ability to effectively fulfil their security mandate through targeted inspections and other risk-based procedures. For this reason, as early as 2013, the International Chamber of Commerce recommended the integration of customs into automated systems run by FTZ administrators. Likewise, the OECD Code of Conduct also stresses the need to maintain updated digital records of all transactions and share this data with the competent national authority in a timely manner. Promisingly, in accordance with the Recommendation, the OECD will establish a mechanism to monitor the performance and compliance with the Recommendation and Code of Conduct.

Recognising the importance of international information sharing in countering illicit trade and trade-based money laundering (TBML) more specifically, the US Department of Homeland Security has promoted the establishment of Trade Transparency Units (TTUs). TTUs are state institutions that share high-level national trade data with other countries, enabling analysts to ‘see both sides of a trade transaction’ and identify potential anomalies indicative of TBML.  Panama and several other South American countries have also established TTUs of their own, with information sharing typically happening on the basis of pre-existing customs mutual assistance agreements.

By Isabella Chase, Anton Moiseienko and Alexandria Reid, RUSI, 5 November 2019

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